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Your level of risk tolerance is how willing you are to see your investments go down in value. It is important to make sure that you understand what you can tolerate, as it will help you make investments that align with your goals. Higher risk investments often offer potentially higher returns, but if you can’t tolerate the risk, you might prefer low risk investments. Take a look at what you need to know about risk tolerance. 

Types of Risk Tolerance

  1. Conservative Risk Tolerance

This type of risk tolerance is for someone who is focused on preserving capital and avoiding any losses. You may earn lower returns on your investment, but you are also likely to avoid large changes in value. One type of conservative investment is a CD, or certificate of deposit. You buy one and get a guaranteed return for a specified period of time. 

  1. Moderate Risk Tolerance

People with moderate risk tolerance will have some conservative investments and some high risk investments. They often split the investments into 60% stocks and 40% bonds. They hope for stocks to grow, while bonds pay a steady income. 

  1. Aggressive Risk Tolerance

When you are aggressive in your investment, the majority of your portfolio will be in higher risk assets, such as stocks and real estate. You have the chance of higher returns, but you need to stay the course. You are taking a chance with this strategy. 

How to Know Your Risk Tolerance

You need to consider several factors when you are determining your risk tolerance. First, consider your goals. You should know whether you are looking to start and grow your investments, or whether you have some money put away and are looking for more. Look ahead and try to decide whether you will need to earn an income off the money later on. 

You should also consider how long you plan to have your money invested. If you need it in the near future, that will impact your investment strategy. Finally, consider how you would feel if you lost 20% this year. If you would be able to leave it there until it comes back up in value, you are okay. 

Your experience in investing is likely related to your risk tolerance. Some people get caught up in momentum around a stock, but when they jump quickly, they are likely to fall again. Take the time to really learn about investing, and you will have more success.