Determining ones risk tolerance involves several different things. First, you need to know how much money you have to invest, and what your investment and financial goals are.



For instance, if you plan to retire in ten years, and you've not saved a single penny towards that end, you may need to have a high risk tolerance - because you could want to do some aggressive and potentially risky investing in order to reach your financial goal.

On the other side of the coin, if you are in your early twenties and you want to start investing for your retirement, your risk tolerance will be lower. You can afford to watch your money grow slowly over time.

Realize of course, that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk.

For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?

Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out. If you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!

There are several different types of investments, and there are many factors in determining where you should invest your funds.

Of course, determining where you will invest begins with researching the various available types of investments, determining your risk tolerance, and determining your investment style - along with your financial goals.

If you were going to purchase a new car, you would do quite a bit of research before making a final decision and a purchase. You would never consider purchasing a car that you had not fully looked over and taken for a test drive. Investing works much the same way.

You will of course learn as much about the investment as possible, and you would want to see how past investors have done as well. It's common sense!

Learning about the stock market and investments takes a lot of time, but it is time well spent. There are numerous books and websites on the topic, and you can even take college level courses on the topic - which is what stockbrokers do. With access to the Internet, you can actually play the stock market - with fake money - to get a feel for how it works.

As a potential investor, you should read anything you can get your hands on about investing.

Again, a good financial planner or stock broker should help you determine the level of risk that you are comfortable with, and help you choose your investments accordingly.

Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It's all tied in together.