Know Your Risk Tolerance

When investing in the stock market it is essential that you watch your risk tolerance. You need to know when you are stepping outside of your comfort zone. I know that you will be encouraged to take risks and that the promise of great returns is a tempting one, however in order to protect your portfolio, you need to be able to manage your risks.

While taking risks can lead to personal and financial growth, you could be in for a disaster if you don't know your limits. Investing is all about risk. Risk is at the center of investing. Without risk, there would be no returns. The risks are calculated relative to the potential payout. Every successful investor has a limit to his or her risk tolerance. The smartest investors recognize how risk factors into reaching their investment goals. They know their limits and they stick with them.

What could go wrong when you pass your risk tolerance level? You can get into serious trouble by ignoring the risk limitations that you have set. For example:

• You could make a bad decision and stick beside it, just making the problem worse.
• You could invest more than a stock is really worth.
• You buy a stock on a hot tip and don't really understand the investment.
• You are blinded by dollar signs, until they start dropping.

You can avoid risk problems by simply knowing what your level of risk tolerance is. This depends on your financial situation and your investment goals. Where are you at in life? There are some basic guidelines for investors and risk tolerance. For example, those nearing retirement need to be more conservative in their investments. Those just starting off in saving for retirement often have time to absorb some losses, and can afford risk in order to make large gains. But it really depends on your individual situation and how much risk you can handle.

In general, don't invest in anything you don't understand. Hot tips are never a good idea. You need to run the numbers behind every investment decision. They will tell you whether or not a stock may be a good deal. Don't invest money that you need for other things. Putting your house on the line in order to invest leaves you with way too much risk -- of becoming homeless, that is. If you buy a bad stock, take a small loss. Don't hold onto it hoping it will rebound. This usually just results in a larger loss. Admit the mistake and move on.

Going beyond your comfort zone can be a disaster. This is your money. Protect it the best you can. Often, you have to even protect it from yourself.

This article courtesy of  http://www.portfolio-4u.com.
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