By Kevin Judge | June 25, 2018
Risk Tolerance: Every person has their own view and tolerance of risk. This is a critical fact in determining their investment strategy.
- Some people are by nature risk averse and will only invest in risk free or low risk investments.
- For example, Government Bonds, Banks Deposits, and AAA investments.
- Other people are risk takers and will take extreme risk hoping for high return. Literally gambling, enjoying the game of risk!
- They will purchase risky investments, such as junk bond or penny stocks and use risky strategies such as buying on margin and naked options.
- A rational investor will vary their risk tolerance based on scenarios that are driven by several factors:
- How important is it to you to achieve the investment goal?
- How soon must you achieve the investment goal?
- How much of the investment can you afford to lose in a worst-case scenario?