the right amount? Again, there is no one-size- fits-all answer. It all depends on your level of risk tolerance. Risk tolerance is how much exposure to loss you’re comfortable with. It’s how much you can afford to lose in pursuit of a big payoff... and how long you can wait to get paid. The amount of risk you take can determine how quickly you meet your goals... or whether you meet them at all. If your goals involve a short time frame, playing it safe might not be good enough. But for someone with more modest goals and a couple of decades to work with, the “slow and steady” approach could be smarter. Start by looking at your investing goals. Can you reach your goals by gradually growing your money over a long period of time? Or do you have lofty goals that require big gains quickly? Also, remember that different portfolios can handle different levels of risk. A large and carefully diversified portfolio can usually rebound from a loss due to a risky investment, while a smaller portfolio could be destroyed by too many risks or even one big risk. Consider, for example, two portfolios – one with $25,000 and one with $250,000. Now, let’s look at how different losses could affect them:
A large and carefully diversified portfolio can usually rebound from a loss due to a risky investment. Maybe you want to protect yourself against economic calamity. Maybe you just want to continue to generate steady income to maintain your current lifestyle. Your decision-making process and the risk-management strategies you use will be completely different in each of the above scenarios. It’s important to realize that your goals matter. The more you understand your own goals, the more likely you are to achieve them. And consistently achieving the goals you set will make you a successful investor... Let’s face it, no stock purchase will ever be risk-free... Taking risks gives investors opportunities to succeed. But different stocks have different levels of risk... And those levels can vary dramatically. So how much risk is ARE YOU RISKING TOO MUCH? Investing isn’t a one-size-fits-all process. Everyone does it for different reasons. And your personal goals have a lot to do with how you decide to manage your investments. You could be looking to earn enough money in the stock market to send your child to college in 10 years. Or you might want to position yourself to make huge gains from a major macro event that you believe is on the horizon.
PERCENT OF $250K PORTFOLIO 0.4%
PERCENT OF $25K PORTFOLIO 4%
AMOUNT LOST $1,000 $2,500 $5,000 $10,000
1% 2% 4%
10% 20% 40%
50
November 2018
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