In financial planning, risk tolerance measures the amount of variability in investment returns that such an investor is ready to accept. When it comes to investing, risk tolerance is essential. It’s also frequently linked to one’s age, yet this isn’t the only determinant. Individuals who have a longer time horizon and are younger, on the other hand, are typically encouraged and able to take on greater risk than those who have a shorter time horizon and are older.
The classifications are based on a variety of factors. Investors are typically categorized into three groups depending on how much risk they are willing to take. Conservative investors are those who invest with the smallest amount of risk. They avoid all risky investments in favor of the ones they believe are the safest. They place more value on avoiding losses than on gaining profits.
Investors that take aggressive risks are well-versed in the market and are willing to take large chances. These investors are familiar with experiencing huge up and down movements in their portfolios. As compared to aggressive risk investors, moderate risk investors are less risk tolerant. They tolerate a considerable risk and frequently designate a maximum loss percentage that they can bear.
Factors Influencing Risk Tolerance:
- Size of the portfolio
- Financial goals
- Comfort level of the investors
- Peer pressure