How Risk Tolerance Can Effect Your Debts

Many people become overwhelmed by the shear amount of investment opportunities that are available today. When deciding the best course of action to take people will inevitably hear that it is necessary to take into account their tolerance for risk. One of the basic fundamentals of investing is that the potential for high payoffs is almost always linked to higher levels of risk. A person. s ability to emotionally tolerate these risks will greatly influence the type of investments that are made. These investments will often impact such important areas as retirement, education, and levels of debt. With so much at stake it is very important to determine the level of risk tolerance that you possess.

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• Are you willing to accept a loss? If the answer is no then this is a clear signal that you have a great aversion to risk. This would limit your investment options considerably. For example, certificates of deposit and certain bonds offer a guaranteed rate of return.

• How long are you willing to sustain a loss? The longer you are comfortable holding onto an investment that is losing money the higher your tolerance for risk.

• Do you demand high performance at all costs? This would be an indicator of a high risk tolerance. High performance and high risk go hand in hand.

Once you understand what your tolerance is you will feel much more comfortable making informed investment decisions. However, keep in mind that at times your tolerance levels may clash with your goals.

• Change your goals. If you are looking for aggressive long range returns but have a very low risk tolerance then this creates a problem. If you decide to stick by your tolerance level then be aware that your goals may need to be adjusted.

• Consider the length of the investment. If you are looking for long term growth but are wary of high risks then remember that the length of time decreases the overall risk. Time allows an investment to rebound in the event that it suffers a loss.

• Factor in inflation. At times a conservative approach may end up carrying the largest amount of risk. This sounds counterintuitive, but it is true none the less. If a conservative investment does not grow at the rate of inflation than this equates to losing money. Perhaps a more aggressive approach should be considered. (1)

(1) http://pubs.acs.org/hotartcl/tcaw/99/may/risk.html

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About the author:

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.