How Much Investment Risk Can You Handle?

Let’s talk about one of Wall Street’s favorite phrases: “risk tolerance”.

Sounds important and a little fancy. Maybe like something a financial advisor says right before handing you a 47-page questionnaire.

But the idea is actually pretty simple.

Risk tolerance is simply how comfortable you are taking risks with your investments.

Not how much risk your neighbor takes, or how much risk some finance guru on YouTube takes. The best investment strategy is one you can stick with when things get ugly.

Here’s a quick example

Let’s say you invest $10,000. A year later it’s worth $8,000. How do you feel? If your answer is “No big deal, markets go up and down”, you probably have a fairly high risk tolerance. If your answer is “Get me out immediately”, you probably have a lower risk tolerance.

Neither answer is right or wrong. The important thing is being honest with yourself.

Why risk tolerance matters

A lot of investing mistakes happen when people invest in things that don’t match their personality.

Someone hears about a hot stock. Or crypto, or some other investment that’s supposedly going to the moon.

They jump in without thinking. Then the investment drops 30% and they’re stressed. Checking prices every hour and losing sleep. Eventually they sell.

An investment isn’t a good fit if it keeps you awake at night.

The three broad categories

Most investors fall somewhere into one of three groups.

Conservative

Conservative investors care most about protecting their money. They’d rather earn less money than risk a large loss. Think savings accounts, CDs, and savings bonds.

A conservative investor may not make as much money over time, but they’ll probably sleep pretty well.

Moderate

Moderate investors want some growth but don’t want to take extreme risks. They’re willing to accept some ups and downs in exchange for potentially higher returns.

This is where many investors land.

Aggressive

Aggressive investors are comfortable with bigger swings in value and investment income. They understand their investments may have some rough years along the way. In exchange, they’re hoping for higher long-term returns.

Think:

• Crypto
• Options trading
• Penny stocks
• Day trading

Aggressive doesn’t mean reckless. It simply means you’re willing to tolerate more ups and downs in pursuit of bigger long-term results.

One more thing

Your risk tolerance isn’t permanent. It can change.

A 25-year-old saving for goals decades away may feel very differently about risk than a 65-year-old living off investments.

Life changes. Goals change. Your comfort with risk may change too.

Why it matters

At Firreo, we’re trying to help people build investments that grow and create income over time.

That requires taking some risk. But not so much risk that you’re constantly stressed out or abandoning your plan every time the market gets shaky.

The goal isn’t to take the most risk. The goal is to take the right amount of risk for you.