What Is Investment Risk Tolerance

Either you run your own investments or has a financial officer, you have probably heard about investment risk tolerance. What does this mean?, risk tolerance is "The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio" (Risk tolerance, 2010). In short, risk tolerance is a measurement of how much you are willing to yield when the economy goes down. Majority of Americans learned what their true risk tolerance when the market went down.

Best way to learn your risk tolerance is to answer a questionnaire. You can use one online or at a financial professional's the same questions, such as:

When will you need the money from this particular account?

What is your investment objective?

What is your total resources?

Don't worry, there are answers to choose from and are most of the time not that many. You will then be grouped based on your answers.

There are 3 types of risk tolerance: conservative, moderate and aggressive. However, the often used charts are moderately conservative and moderately aggressive risk tolerance as well. It is important to know your risk tolerance since it is the very foundation of putting up a personal investment portfolio. Differences in risk tolerance results to different combinations of fixed and equity investments as well as growth and value investments within a given portfolio.

Conservative investors have the lowest risk tolerance; since they prefer not to dispose any money or to lose very little. Apparently they are also open to negotiate for a lower earnings. They stay with investments with assured rates of return such as money market accounts, CDs and bonds with little hazards to stocks. The basic combination of fixed and equity investments in a conservative portfolio is 80/20.

Moderate investors can handle some hazard; it's either they have a lot of time before they need the money or they have many of assets to amend for the losses. Oftentimes moderate portfolios need around 50/50 combination of assets.

Aggressive investors can manage the most risk in dreams of getting the highest profits. They more likely have big net worth and can invest in big investments as real estate investment trusts, unit investment trusts, limited partnerships and other investment vehicles not accessible to middle-class American. The most common fixed-equity investment combinations in an aggressive portfolio is 20/80. There are even some who goes for 100% in the market.

If you want to know how to become rich, be sure to figure out your risk tolerance and come up with an appropriate investment allocation for your portfolio. If you are more conservative player, a wrong appropriation will leave you anxious and panicky about losses. If you are a moderately aggressive or an aggressive investor, an overly conservative portfolio will leave you unthrilled with the profits.