Your risk tolerance is your level of comfort with the ups and downs of investing. In order to make the best investment for you as an individual, you will want to find assets that match your risk tolerance.
Low Risk Tolerance
Are you going to lose sleep whenever your assets decline in value? If so, your tolerance is low. Investments that match your risk tolerance profile include basic savings accounts, money market deposit accounts and certificates of deposit.
Medium Risk Tolerance
If you don’t sweat small declines, but do stress over the big ones, your tolerance is medium. Investments that match this risk tolerance profile include stocks of large, established, financially healthy companies and mutual funds that balance stock and bond holdings.
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High Risk Tolerance
Those with a high tolerance aren’t bothered by market swings as they are only concerned with long-term gains. Those with a high risk tolerance will likely find their investment matches in sophisticated, higher-risk investments and stocks of startup companies.
Adjust Investments as Risk Tolerance Changes
Your risk tolerance will change as your investment goals, financial situation and life experience evolve. Generally, the longer the length of time until you need your money, the more risk you can afford to take. In order to make the best investment, consider where you are in life.
Risk tolerance is highest for investments you have chosen to meet faraway goals, such as retirement, because your investments have more time to potentially recover from drops in value.
Conversely, tolerance is lowest for investments to meet short-term goals, such as saving up for educational costs, vacations and other instances where you will need the money sooner.
Those who do not want to constantly reassess their investments to ensure they match their risk tolerance as life progresses may want to look into target retirement funds.
[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]