What is the risk tolerance?
Risk tolerance concerns the amount of the risk that the investor is willing to accept in the investment. Investors use the risk tolerance to determine how to allocate their investment within their portfolio. They also use risk tolerance levels to ensure that their portfolios are sufficiently diversified. For example, maintaining money in a bank account is considered to be a risk -free investment in most countries, as insurance companies such as FDIC in the United States are ensured that money will be safe within the bank. Money cannot be lost, but also earns very low, if at all, the return on investment. In other words, the bank pays the investor a very low interest rate or even no interest to keep the money in the bank.
Since the investment becomes risky, the rate of return is increasing. For example, the accounts for deposits and the treasury pay a higher -year rate than bank accounts, because these investments are associated with a slightly greater risk. Still payA lower return rate than shares or mutual funds, because there is a greater risk of loss when investing in shares and mutual funds.
Every investor determines what he is willing to invest on the basis of his risk tolerance. The investor, who is at risk, has a low -aid tolerance, thus choosing safer investments. It will gain a much lower interest rate than the investor willing to take more risk - especially if the second investor enters highly speculative investments with the potential for very high profit - but will also have a relatively little chance of losing their entire investment.
The investor's risk tolerance usually changes over time. Younger investors can afford to take more risks, as they usually will not need the proceeds from their grind for a longer period of time and because they can afford to wait for the market to turn. Older investors generally become aversion risks as aged,And they are moving the allocation of assets in their portfolio from primarily shares to bonds and other safer investments, because they may not be able to wait for the market drop to turn before it has to start drawing from investment. Fixed income pensioners are usually the most anchored risk because they depend completely on the income of their assets so that they can live and cannot afford to lose their capital in a bad or risky investment.