With soaring inflation soaring and turbulent markets, it’s a good time to discuss an important concept: Risk tolerance.
You’ve probably heard those words bandied about when talk turns to investing. But do you know what they mean?
Risk tolerance is generally defined as the ability to stomach large swings in the value of your investment portfolio. The market, by nature, is very volatile. It’s vital to understand your level of tolerance for risk in order to make prudent decisions.
Here are 3 factors to help you figure out how much risk you can tolerate:
The first factor is time. When will you need the money? Generally, you can take a lot more risk if you’ve got 10-years or more. Money you need in the next 3-5 years should be in cash. You don’t want to be forced to sell if the market is down.
The second factor is cash reserves. How much cash do you have on hand? If all your money is fully invested, with no extra cash to cover unexpected expenses, that would be a problem. Either you must sell at a loss or go into debt.
The third factor is sleep. How much volatility can you stand before you start stressing out, unable to sleep at night? We all know what happens if we don’t get enough shut-eye. Everything suffers!
Those factors are crucial considerations. But keep in mind. Your biggest risk is not protecting yourself against inflation.
Stuffing your entire savings under the mattress is like living in a house full of termites. Even if nothing seems awry, you’ll doubtlessly be dealing with costly damages down the line.
What do you feel your risk tolerance is? Has it changed in the current market situation? Tell me what you think below.
Barbara Huson
Barbara Huson is the leading authority on women, wealth and power. As a bestselling author, financial therapist, teacher & wealth coach, Barbara has helped millions take charge of their finances and their lives. Barbara’s background in business, her years as a journalist, her Master’s Degree in Counseling Psychology, her extensive research, and her personal experience with money give her a unique perspective and makes her the foremost expert on empowering women to live up to their financial and personal potential.
Barbara is the author of 7 books, her newest, Rewire for Wealth, was published in 2021. You can learn more about Barbara and her work at www.Barbara-Huson.com.
