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Risk tolerance is a good indicator of what types of investments are “right” for you and is generally measured by a mixture of your own personality, belonging assets, financial expectations, ability to deal with financial stress, and at what point you are currently in life relative to the term of investment and a comfortable retirement.

If you had a sum of money that you wished to invest at a recognized major bank, but did not know what to invest in, your financial advisor would most likely ask you a series of questions to gauge your risk tolerance before making any investment recommendations. By asking you these questions, they are safeguarding not only your money but also your future happiness relative to your decision to invest with them. The other thing they are safeguarding, which many people do not know, is themselves from liability issues such as lawsuits from disgruntled clients who lose their money because they believe they were mislead by the bank in to their now deflated investments. By having you complete a risk tolerance survey, they put the accountability back on to you for your own decisions.

If you take your money and invest it yourself with other profit seeking organizations (ie. buying stocks or commodities, purchasing land as an investment, buying rental property, etc) you may not be as fortunate to get thorough advice from an investment specialist matching your personal risk tolerance, because many investment venues only care about making a sale to boost their own commissions/profits and not so much about the customer’s future happiness. So, you must take the onus on yourself to understand what your own personal risk tolerance is and what kind of investments are right for you.

To figure out what type of investments are “right” for you, you should ask yourself a few basic questions:

• What percentage of my total assets am I planning to invest?
  • Obviously the higher the percentage, the larger the risk you are taking on by gambling - oops, I mean “investing” it.
  • Am I borrowing money to take on this investment?
    • Borrowing money to invest means that you are leveraging (going into debt) and must pay it back (normally with some kind of interest) so your investments must now cover the loan principal and loan interest before it can start to make any profits for you. It doesn’t really tell if you are going to be more or less risky with it, but it is something you should always be keeping on your mind as you are playing with money that is not yours to start with.
  • What percentage am I comfortable losing on this investment?
    • If you are willing to lose a large percentage of your investment and truly believe you will still be able to sleep soundly
    • If the stress builds up in you at the thought of losing any money at all then you need to stick with conservative ventures.
  • What kind of realistic percentage minimum return would I be happy with?
    • If you happy with a 5% return and believe that making something is better than nothing, then a conservative approach is more suitable for you.
    • If nothing less than a 50% return would satisfy you, then you would have to be willing to take higher risks to achieve such gains.
  • What kind of realistic maximum term would I be willing to wait for a positive return?
    • If you are willing to wait for a longer term, then you have more time to absorb wild and riskier trends.
    • If the time is limited or you are in need of this money, then you need to play it safe and buy into something that will not dip so easily.
  • Am I close to retiring?
    • If you are close to retiring and your savings will become your only source of income, then you cannot responsibly invest in high risk endeavors. You need to look at more dependable investments but potentially smaller returns
    • If you are far from retiring and have a steady source of income then you have room to breathe when it comes to selecting riskier endeavors.
  • Do I have dependents that require my financial support?
    • If you do, then a monetary loss affects not only you but your loved ones as well, and thus is not worth risking with more volatile investments.

Once you have a good sense of where you are in the risk tolerance scheme, you can then diagnose the investments available to you and whether they are a good match for you. Try to be realistic when thinking about what the expected returns are on your potential investments and in what kind of realistic time frame would be possible.