Risk tolerance is basically how one reacts to risk, what the level of anxiety is when you feel that there is a risk or even a possibility of a risk present.
In terms of investment, how much will your risk tolerance be in case of stock market investment?
How much money loss is acceptable for you?
Are you willing to bet a hundred dollars for a chance to win a thousand dollars?
Or will you bet a thousand to win a thousand and follow a trend?
- All humans have a different level of risk tolerance, and while there is no exact right balance to be told, it is different for every person.
You must always assess your risk tolerance before investing.
3. Setting proper goals
Investing in the stock market blindly, without setting any short term or long term goals, isn’t wise.
What matters is why you are investing in the stock market in the first place.
When are you expecting a return on investment? Are you going to need the cash back in six months, or in five years? Are you investing to get some cash for retirement or to purchase a house?
It is best to know the purpose and your goals before investing in the stock market.
- The changing nature of the stock market can't guarantee that all your capital will be present when you require it.
By determining how much capital is needed, you can actually calculate how much you can invest and how much time it will be returned.
4. Investments should be diverse
Experienced investors, such as Warren Buffet, do not support the idea of
stock diversification due to their belief that they have done a hundred percent research necessary for the identification, as well as quantification, of the risks involved.
- They believe in putting all the eggs in one basket, and then observing the basket.
However, you cannot make the mistake to follow this strategy at the start of your investment years.
Always have a variety of exposure to minimize risk, even if it has to be different countries.
5.Have a reign on your emotions
This relates to the point about knowing your risk tolerance.
- In any short term period, the stock prices are the collective emotions of the whole investment community.
Therefore, the inability to reign in your emotions is very damaging, as this affects the ability to make rational decisions.