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Everything in life entails risk.

You are taking a risk when you cross a road.

If you are not careful, you may get knocked down.

You are taking a risk when you start a new business.

 

If you do not know the supply and demand of your niche, your business may end up as a flop.

The same applies to Investment. No exceptions.

Doing investment, especially stocks, is definitely not for the faint hearted.

Before delving into it, knowing exactly the kind of risk that investment brings is extremely important.

Not only should you understand the risk involved, but also your risk tolerance level and a few other factors.

Let’s jump right into it, shall we?

 

What Kind Of Investor Are You?

 

All of us are unique individuals. We come from different background and have different needs. 

We also think and approach things differently.

We have to recognize this important fact - what may work for you may not work for others. Simply put - your mileage may vary.

 

Don’t start investing before you ask yourself the following vital questions:

 

Investment Horizon

• Are you in for the long haul or are you focused on smash and grab short term profits?

 

Investment Psychology

• Are you willing to follow your investment plan right down to the tee?
• When you have hit your investment target, will you continue to hold out in hope of more profits (can you control your greed)?
• Are you able to ride out a short term loss on a stock you know has good potential with sound fundamentals (can you control your fear)?
• Do you have the decisiveness to cut loss, instead of wishing the stock will make a rebound (can you stop hoping)?

 

Risk Tolerance

• Are you willing to wait out for more than one year to see substantial gains (1 fold or more)?
• Do you feel the strong urge to cash out after only a gain of 5% (conservative outlook)?
• Do you prefer safe but slow growth blue chips stock or hot exciting but volatile growth stocks?
• Is the liquidity of the stock important to you?
• When do you  need the money? By next week or  next year?
• Can you take a 100% loss in a worst case scenario (assuming no leverage)?
• IMPORTANT: Can you stomach volatility (stocks are known to move as much as 42% in just a single day!)?

 

Investment Methodology

• Are you dividends, value or growth focused?
• Do you prefer to put all your eggs in one basket or diversified across a range?
• Are you fundamental or technical inclined? Or both?
• Do you see yourself as a speculator, trader or investor?
• Do you see yourself as an active investor, willing to put in tonnes of research and monitoring, buying and selling everyday?
• Or are you a set and leave on autopilot mode passive investor?

 

Think over these questions - carefully and hard - and answer them honestly!

When you have them thought out, you will be in a much better position to let your money work harder for you.

Remember, knowing your risk profile well goes a long way in helping you become a successful investor. 

And of course, you can always turn to your friendly and trusty StocksForGrads.com for more tips and strategies that are coming your way.

 

Play It Smart,

Jag Foo

Chief Editor

 

 

This article is available as a PDF Download

“How Knowing Your Risk Tolerance Can Make Or Break You” PDF Download

 

tag:Fundamental Investing Investing Basics Investment Risk Profile Speculator Technical Investing Trader

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