What Is Risk Tolerance?
Risk tolerance refers to the ability of a person to take risks, that is, how much investment loss you can afford without affecting your normal life. Risk tolerance should be measured in a comprehensive way, which is related to personal assets, family conditions, work conditions, and so on.
Risk tolerance
Investors usually face two risks. The first is the risk of losses due to short-term fluctuations. When the market is bad, the stock may
Factors affecting risk When considering the degree of short-term fluctuations that you can bear, you may wish to pay attention to some special risks associated with investment. Risk is a by-product of investment. When risks show up, volatility occurs. But by diversifying your investment, you can reduce the huge impact of any one risk factor, and thus alleviate short-term fluctuations.
Market risk. Market risk depends on the proportion of positions in a certain type of asset or industry, such as the proportion of your investment in stocks and technology stocks. Correspondingly, there is a risk of losing money in such assets or stocks in this industry. Therefore, in order to control market risks, you may wish to spread your investment across different asset types and different industries, so-called not to put eggs in the same basket. Corporate risk. For individual stocks, short-term fluctuations originate from the operating risks and stock price risks of listed companies. Operating risks are mainly factors that affect the fundamentals of the company's operations and performance. Stock price risk is more related to the performance of the company's stock, such as whether the stock price is higher or lower than the company's net profit, cash flow, and sales income.
Economic risk. Changes in macroeconomic factors such as inflation, changes in interest rates, and economic growth rates, or even just market expectations and rumors, will cause short-term fluctuations. This point, I believe that domestic investors have been deeply moved by the macro tightening policy and interest rate hike this year. Therefore, in order to limit economic risks, you may wish to invest in securities that are less cyclically affected. Country risk. Regardless of whether you or your fund only invests in domestic stocks and bonds or shares in several countries at the same time, your portfolio position is exposed to the risks of the country in which you invest. Including political risk, economic status, exchange rate risk, etc. To this end, you can spread risk in two ways. On the one hand, invest in securities in different countries or regions. On the other hand, if you only invest in domestic securities, you should consider whether the portfolio is overly dependent on the success of the listed company in a certain country or region, such as the degree of internationalization of the business of the listed company. How much short-term fluctuations you can tolerate Your investment cycle and investment goals will determine your tolerance for short-term fluctuations. People are not plants. You cannot remain indifferent to fluctuations. Therefore, do your homework in advance and consider what short-term fluctuations cause your response to affect the achievement of financial goals. Then, minimize the possibility of short-term portfolio volatility, such as diversified investments between different markets and companies. Finally, here are a few questions to answer that will help advance your thinking about short-term volatility and risk. How much can you afford to lose for one year? How much can you afford to lose for five years? What is the highest loss you can afford for a single fund or investment? How do you plan to diversify your investment? Before you decide whether to include a fund or an investment in your portfolio, what kind of risk assessment will you do?
