Risk Tolerance

Risk tolerance is just a fancy phrase meaning how much stress you feel from fluctuations in any of your investments. A good financial advisor will always pinpoint your risk tolerance, and refer to it in all of your investing decisions. The three most general types of people are Conservative, Moderate, or Aggressive in their investing decisions, and you too are somewhere in-between.

The numbers in the picture above are just examples, however they probably fall pretty close to your ideal percentages, depending on your level of risk tolerance. If you have to decide yourself, consider these rough examples:

• If you stay awake at night thinking about the performance of your investments, at all, or have ever hand a nightmare about them in any way, you are very likely a very conservative investor. Make every effort to ensure that no considerable part of your portfolio fluctuates much in the short term!
• If you are someone who can easily tolerate declines in your account(s) because you believe that fundamentally your bottom line will go up each month or each year overall, then you are quite likely an aggressive investor.
• If you feel like you're right between the two examples above, then you're a moderate investor. Among all the educated investors out there, this is understandably the most popular category.

A professional Financial Advisor giveing qualified investing advice would be likely to show you at least 5 examples of possible loss versus possible rewards and ask you to point to the one you feel is your case. Try if you can to decide how much money you'd be comfortable risking in order to make twice as much by the end of your time horizon, and that's pretty much what these fluctuation graphs look like. After deciding for yourself which you are, write it down with your other answers as well, if for no other reason than to remind yourself on step #6.

This step is not as important to the outcome of your account as it is for your happiness in the meantime. It also helps bring about a more realistic set of expectations. Since it will always be a good thing to feel content with your investments, no matter how they are performing at the time, don't skip this step, which is the only one where you address that at all. If you aren't accurate assessing yourself here, it is only yourself that you cause stress for later.