Your emotional make-up plays a significant role in how you create your investment mix. Intellectually, you may accept that stocks and bonds should be a major part of your investment mix. Emotionally, however, you may not be comfortable with the sometimes wild roller-coaster ride of the stock and bond markets.
There is no simple scale to measure your tolerance (or intolerance) for short-term risk. For some investors, a "conservative" stance is investing half of their money in stocks; for other investors, it means avoiding stocks altogether.
By asking yourself a few simple questions, you may discover the type of investor that you should consider yourself.
Do market fluctuations keep you awake at night?
Are you unfamiliar with investing?
Do you consider yourself more a saver rather than investor?
Are you fearful of losing 25% of your assets in a few days or weeks?
If you answered "yes" to these questions, you are likely to be a "conservative" investor.
Are you comfortable with the ups and downs of the securities markets?
Are you knowledgeable about investing and the securities markets?
Are you investing for a long-term goal?
Can you withstand considerable short-term losses?
If you answered "yes" to these questions, you are likely to be an "aggressive" investor.
Or, if you fall somewhere in between the two, you could call yourself a "moderate" investor.
Risk tolerance varies from one investor to the next. Indeed, two individuals with identical investment objectives, time frame, and financial resources, may possess polar opposite risk personalities. Gauging your tolerance for risk requires some knowledge of the financial markets as well as an honest appraisal of what level of risk you are willing to accept.