David Lerner Associates: Evaluating Risk Tolerance
Risk tolerance is an investment phrase that describes your ability to endure market volatility. All investments have some level of risk, and if you're planning to invest your money, it's important to become familiar with how much volatility you can endure. Your tolerance for risk affects your choice of investments and the overall makeup of your portfolio.
If you are trying to gauge your own tolerance for risk, think about the following aspects:
- Character: Are you able to sleeping at night being aware that you've put a portion of your hard-earned dollars in danger in a certain investment? Remember, it may be easy to tolerate a high-risk investment while it is generating double-digit returns, but consider whether you'll feel the same way if the market takes a downward turn with your investment leading the way. It's best to invest at a level of volatility that you are comfortable with.
- Time horizon: The sooner you may need to use your investment dollars, the lower your risk tolerance. For instance, for money you plan to use to make a down payment on a house in 2 years, your risk tolerance is lower than if you're investing for retirement in 20 years. If you can keep your money invested for a long period of time, you may have the ability to withstand any downturns in the market (though time alone is no assurance of higher returns).
- Capacity for risk: Just how much can you afford to lose? Your capacity for risk depends upon your financial position (i.e., your assets, income, and expenses). In general, the more resources or assets you have to fall back on, the higher your risk tolerance.
Many risk tolerance tests are widely offered on the Internet and in books about investing. Most demand that you answer a series of questions, and generate a score based upon your answers. The score translates into a measure of your risk tolerance and may be matched with the types of investments that the author deems appropriate for someone with your risk profile. Although these tests may be helpful as a reference, your financial plan should be tailored to your unique circumstances. Don't hesitate to get expert help if you need it.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.
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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 1-800-367-3000 Visit our website: http://www.davidlerner.com