Your Return Objectives. The higher the return you require in order to achieve your financial goals, the greater the amount of risk you will need to take.
Your Age. The younger you are, the greater the amount of risk you can take. Why? Simply because you have more time to recover from any losses that you incur and because you have more income-earning years ahead of you.
Your Total Assets. The larger your total assets, the greater the amount of risk you can take. This is because you have more to draw from for your regular expenses should you incur losses in some of your other investments.
Your Investment Time Horizon or the Length of Time you are Willing to keep your Money Invested. The longer your time horizon, the greater the risk you can take. The reasoning behind this is similar to the reason behind age: the longer the time horizon, the more time to recover from any losses.
Your Past Investment Experience. the partly determines your attitude to risk. A bad experience from a past investment may make you more gun-shy and risk averse. Or, investment carries and could have made you more willing to take on risk.
Your General attitude to risk. Other factors such as your presonality or the people around you may influence your appetite for risk.
The first five factors determine your ability to take on investment risk. These are the more objective determinants of risk tolerance. The last two determine your attitude towards risk and are obviously a bit more subjective. It's more important to understand the distinction between a person's ability to take on risk andhis attitude towards it. Sometimes, there are people who objectively can take on much more investment risk than they are currently taking but simply refuse to do so because they are jsut not comfortable with the idea of losing money. On the other hande, there are people who are willing to take on more risk even if they literally cannot afford to do so. Neigher is ideal investor behavior. It's always good to achieve a balance.
Understanding your risk tolerance then helps you determine which investments are suitable for you.
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