Everyone handles risk differently. That's
because some people can live with — or can afford to take
— more risk than others.
The younger you are, the more investment
risk you generally can afford to take. That's because you
have the time to wait for a rebound when there is a downturn in
the market. But if you've retired or are nearing retirement,
you may be counting on income from your investments. That increases
the likelihood that you'll want to avoid the risk of losing
principal even if you make yourself more vulnerable to inflation
risk.
Your life situation also plays a role in
how much risk you are willing to take. If you have children who
will be going to college in the next few years, or aging parents
who depend on you for financial support, you may need to keep
more of your portfolio in stable, fixed-income investments, to help cover your short-term expenses. Or,
if you're taking the risk of building your own business,
you might be more comfortable making investments that you know
you can count on.
Your personality matters as well. There's
no way around the fact that most investments will drop in value
at some point. That's what risk is all about. But most experts
agree that it's counterproductive to make investments that
either make you so nervous you can't sleep or mean you'll
sell in panic at the first sign of a downturn. However, if you're
uncomfortable with risk, they also encourage you to learn more
about the long-term rewards of well-planned risk-taking.
You can build your risk tolerance
— or compensate for it — in several ways:
Start investing slowly in investments that
don't require constant monitoring and gradually
expand your horizons. Keep track of stock and stock mutual fund performance,
so you get used to their values moving up and down. Keep track of what's happening in the
markets at large. Discuss what your impressions of the market
are, and talk about any changes you're considering
in investment strategy with your financial adviser.
