Continue reading...Risk tolerance is a topic that is often discussed, but rarely defined. It is not unusual to read a trade recommendation discussing alternatives or options based on different risk tolerances. But how does an individual investor determine his or her risk tolerance? How can understanding this concept help investors in diversifying their portfolios? Read on as we delve into this concept.
Risk Tolerance by Time frame An often seen cliché is that of what we’ll refer to as “age-based” risk tolerance. It is conventional wisdom that a younger investor has a long-term time horizon in terms of the need for investments and can take more risk. Following this logic, an older individual has a short investment horizon, especially once that individual is retired and would have low risk tolerance. While this may be true in general, there are certainly a number of other considerations that come into play.
First, we need to consider investment. When will funds be needed? If the time horizon is...
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