Financial Risk: More Than a Game of Strategy

Financial risk tolerance is simply a measure of how much of a loss an investor is willing to endure within a portfolio and his or her willingness to accept higher risk in exchange for the possibility of higher returns. 

Financial risk tolerance looks at how much market risk—stock volatility, stock market swings, economic or political events, regulatory, or interest rate changes—an investor can (or is willing to)  tolerate, considering that all of these factors might impact their portfolio.  

Investors generally fall into three different types of risk categories:

  • Aggressive Risk investors are those who understand that there may be large losses and gains and are comfortable with making high risk investments.
  • Moderate Risk investors are comfortable with some risk and prefer to balance risky with safe investments. They usually have a percentage of loss they are willing to risk. 
  • Conservative Risk investors prioritize avoiding losses above making gains. They do not invest in anything risky and go for the options they feel are safest.

Generally, an aggressive investor, or someone with higher risk tolerance, is willing to risk more money for the possibility of better returns than a conservative investor, who has lower tolerance. Those younger in age, with a longer potential time in the market, generally may be more aggressive in their level of risk tolerance than someone perhaps near retirement or older.

For most, taking a risk is a necessary part of making any financial investment. An investor’s age, investment goals, income, and comfort level all play into determining their risk tolerance. In addition, life events such as buying a home, paying for college or planning for retirement may affect an investor’s risk tolerance.


A Journey to Personal Financial Success

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