What is Risk Tolerance?
There’s no way to avoid risk altogether when it comes to investing, but there’s a lot we can control.
Understanding our risk tolerance is the first step to helping us make sound decisions and knowing what we can control to keep us feeling safe and confident when investing.
So, what is risk tolerance?
Risk tolerance is the level of risk you’re willing to take when investing your money. Ok, that sounds straightforward enough, right?
Since there’s simply no way to avoid risks altogether when we invest, we want to understand what risks are involved so we can feel more comfortable choosing our investments. Knowledge is power, friend!
Risk Tolerance Levels
Some people want to achieve the highest returns possible and are willing to accept the high risk that comes along with it (aggressive). Some people feel a little nervous with that approach and want more balance (moderate). And some people are willing to accept lower returns for a sense of stability (conservative). Most people fall into some version of all three of these.
High-Risk and Low-Risk Investments
While all investments have some level of risk associated with them, some are riskier than others. Let’s take a look at some common examples of high and low-risk investments.
Low-Risk Investments
Cash, FDIC-insured checking and savings accounts, most bonds, money market funds, and CDs are low-risk, low-reward investments. In fact, many of these don’t involve investing your money at all—like keeping it in cash or an FDIC-insured bank account.
Medium-Risk Investments
Index funds (most Mutual Funds and ETFs), real estate, and sometimes individual stocks can also creep into the “high-risk investments” category if you’re not careful. Let’s call stocks medium+, maybe?
High-Risk Investments
High-risk investments include cryptocurrency, NFTs (remember those? lol), penny stocks, IPOs, futures trading, etc. Basically, if you can’t comfortably explain it to a seven-year-old, you probably shouldn’t be investing in it.
Below is a chart that shows several different investments from least risk to most.
Wrapping Up
There isn’t necessarily a wrong way to approach risk in investing, but understanding what you’re okay with is super important when crafting your own portfolio.
The key to mitigating risk in your investment portfolio is to diversify! If you have a high-risk tolerance and want to stick with a more aggressive approach, by all means, do so, but you probably don’t want to go throwing all your money in ONLY crypto or a single stock, even if it’s a company that seems great, like Apple. If Crypto crashes tomorrow or Apple goes under, you’d end up losing all of your money. Simply put, don’t put all your eggs in one basket.
Want to see more of this in action? You should come to my investing party! I’ll walk you through how to set up an account and start investing with only $1. It does not get lower risk than starting with $1. You CAN do this; it doesn’t have to be scary.
