If you are investing money or planning on doing so, there is one very important question you should ask yourself: What kind of investor am I? Knowing if you are an aggressive or conservative investor is the first step to knowing how you should invest your money.
Determine your risk tolerance
First you need to determine your risk tolerance level. Risk is the amount of volatility and uncertainty you’re willing to accept from an investment in seeking your financial goals, like planning for retirement or a college education.
Some investments carry a higher level of risk than others. Generally, the higher the risk of an
investment, the greater its potential returns. However, there is also a greater potential to lose your initial investment. The lower the risk, the less likely it is for
that investment to generate a higher rate of return. When you invest your assets in financial products that assume little or no risk, your money may not have the opportunity to grow as fast as you would like. To help determine your risk level, ask yourself, “How comfortable will I be watching my investment go up and down in value?” The more comfortable you are with price volatility, the greater the risk you are probably willing to assume.
The next step in the process of determining your profile as an investor is to identify your time horizon, the amount of time between now and when you hope to reach your stated goal.
Generally, the more time you have, the more risk you can afford to assume. The reasoning is: the longer your time horizon, the more time you have to ride out the market’s ups and downs in pursuit of your financial goals. Knowing what level of risk you are comfortable with can help you determine whether you are a conservative investor, an aggressive investor or somewhere in between. This is an important first step because then you can focus on investments that provide you with the levels of risks and potential returns with which you are comfortable.
To find out more about the type of investor you are or the different types of investments that are available, contact a financial services professional. There is no assurance that any investment will achieve its investment objectives. Investment return and principal value will fluctuate and the investment, when redeemed, may be worth more or less than its original cost.
— Written by Adam Rope, a State Farm agent based in Waxahachie.