CFA Mind Maps - Best CFA Books for CFA Exam

Determine Your Risk Tolerance

 

Each individual has a risk tolerance that should not be ignored. Any good stock broker or financial planner knows this, and they should make the effort to help you determine what your risk tolerance is. Then, they should work with you to find investments that do not exceed your risk tolerance.

 

Determining one’s risk tolerance involves several different things. First, you need to know how much money you have to invest, and what your investment and financial goals are.

 

For instance, if you plan to retire in ten years, and you’ve not saved a single penny towards that end, you need to have a high risk tolerance – because you will need to do some aggressive – risky – investing in order to reach your financial goal. 

 

On the other side of the coin, if you are in your early twenties and you want to start investing for your retirement, your risk tolerance will be low. You can afford to watch your money grow slowly over time.

 

Realize of course, that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk. Again, there is a lot in determining your tolerance.

 

For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?

 

Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money! 

 

Again, a good financial planner or stock broker should help you determine the level of risk that you are comfortable with, and help you choose your investments accordingly.

 

Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It’s all tied in together.

 

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Investment Strategy

 

Because investing is not a sure thing in most cases, it is much like a game – you don’t know the outcome until the game has been played and a winner has been declared. Anytime you play almost any type of game, you have a strategy. Investing isn’t any different – you need an investment strategy.

 

An investment strategy is basically a plan for investing your money in various types of investments that will help you meet your financial goals in a specific amount of time. Each type of investment contains individual investments that you must choose from. A clothing store sells clothes – but those clothes consist of shirts, pants, dresses, skirts, undergarments, etc. The stock market is a type of investment, but it contains different types of stocks, which all contain different companies that you can invest in. 

 

If you haven’t done your research, it can quickly become very confusing – simply because there are so many different types of investments and individual investments to choose from. This is where your strategy, combined with your risk tolerance and investment style all come into play. 

 

If you are new to investments, work closely with a financial planner before making any investments. They will help you develop an investment strategy that will not only fall within the bounds of your risk tolerance and your investment style, but will also help you achieve your financial goals. 

 

Never invest money without having a goal and a strategy for reaching that goal! This is essential. Nobody hands their money over to anyone without knowing what that money is being used for and when they will get it back! If you don’t have a goal, a plan, or a strategy, that is essentially what you are doing! Always start with a goal and a strategy for reaching that goal!