How much Risk Can You Handle?

With soaring inflation soaring and turbulent markets, it’s a good time to discuss an important conceptRisk tolerance.

You’ve probably heard those words bandied about when talk turns to investing. But do you know what they mean?

Risk tolerance is generally defined as the ability to stomach large swings in the value of your investment portfolio.  The market, by nature, is very volatile. It’s vital to understand your level of tolerance for risk in order to make prudent decisions.

Here are 3 factors to help you figure out how much risk you can tolerate:

The first factor is time. When will you need the money? Generally, you can take a lot more risk if you’ve got 10-years or more. Money you need in the next 3-5 years should be in cash. You don’t want to be forced to sell if the market is down.

The second factor is cash reservesHow much cash do you have on hand? If all your money is fully invested, with no extra cash to cover unexpected expenses, that would be a problem. Either you must sell at a loss or go into debt.

The third factor is sleep. How much volatility can you stand before you start stressing out, unable to sleep at night? We all know what happens if we don’t get enough shut-eye. Everything suffers!

Those factors are crucial considerations. But keep in mind. Your biggest risk is not protecting yourself against inflation.

Stuffing your entire savings under the mattress is like living in a house full of termites. Even if nothing seems awry, you’ll doubtlessly be dealing with costly damages down the line.

What do you feel your risk tolerance is? Has it changed in the current market situation? Tell me what you think below.

Comments & Feedback

  • Ines Meneses

    Barb, I love your ability to explain concepts in simple ways that are easy to grasp. Breaking down risk tolerance to 3 factors… time, cash reserves and sleep… that makes a lot of sense.

  • Lisa

    Morning Barbara,

    I would like to take a high risk and invest in an obscure stock I’ve never really thought about investing in before. I don’t know what that is yet, but I do know I would research a lot about it first. This would mean I would have to be okay with losing the money, just breaking even, or possibly making an incredible amount of money one day. Usually, I invest in companies everyone has heard about and in things you can’t really go wrong with like Walmart. I think uncle Warren and Bill Gates have a bit of Walmart stock in their portfolio. I have an idea about what kind of things Walmart will be doing in the future, so I don’ buy stocks willy nilly.

    Through therapy, I found out I take “managed risk”. One of my friends accused me of being a bit too controlled and rigid and adverse to hardship and said that I need to take some risk. It’s not true. I’ve taken lots of risk. I left home when I was 22 years old to live in a country where I couldn’t speak the language well and where I knew nobody. I liquidated a mutual fund and my 401K when I left the states to try a new freelance career. It didn’t do too well; however, I still make little bits of money from it now and then and it took me on a wonderful adventure!

    This friend of mind got herself (and now her current family) into a tremendous amount of debt. Believing that she’s very entrepreneurial, she thought that one day she would invent an idea or a company that would very quickly pay back everything she owes, which justified her spending. What I’m doing is not conservative at all, it’s slightly progressive and what she does is not about taking a risk at all, it’s backward. You don’t spend lots of money before you start to make it.

    As for long term friendships and relationships, I’m very conservative. I leave no rock unturned before I decide to quit them!

    • barbara huson

      My only advice for investing in an obscure stock is never put any amount in one investment that you can’t afford to lose. I’ve followed that for over 30 years…and while I’ve had quite a few losses, I’ve still come out way ahead!!! Good luck!

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Meet Barbara Huson

When a devastating financial crisis rocked her world, Barbara Huson knew she had to get smart about money… and she did. Now, she wants to empower every women to take charge of their money and take charge of their lives! She’s doing just that with her best-selling books, life changing retreats and private financial coaching.

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