Risk Tolerance
Candlefocus EditorRisk tolerance is affected by a variety of factors, the most important of which is typically age. Younger investors typically have the ability to absorb greater risk due to having more time to rebuild a portfolio. Generally speaking, they may be more open to taking on riskier investments, as they will have more time to recoup any losses in the event that their risks don't pay off. Older investors may prefer more conservative investments with more guaranteed returns due to having less time to accumulate profits and losing purchasing power due to inflation.
Other factors that can influence an investor’s risk tolerance include the size of their total investable assets, whether the investor has dependents or liabilities, the amount of income they are expecting from investments, their goals for their investments, their past experience with investments, their expectations for the future and their emotional state. Investors should take into account every factors that could influence their decision making process and adjust their risk tolerance accordingly.
Risk tolerance can also be influenced by current events and the mood of the market. For example, during a period of economic growth, investors may have a greater tolerance for risk because they may be expecting the value of their investments to rise. On the other hand, during a period of economic contraction, investors may become more wary of taking on risk, resulting in a decrease in their risk tolerance.
Understanding one's risk tolerance is key to successful investment. It is important to take into account all of the factors that may influence an investor's willingness to take on risk, as well as the current market conditions. Doing so can help to increase the likelihood that investors will achieve their desired returns while protecting their capital.