How Much Risk Can You Tolerate?

Written by Barbara Huson

Risk 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. Because the market, by nature, is very volatile, understanding your risk tolerance is vital for making prudent decisions.

There are 3 factors to help you figure it out.

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 all be in cash. You don’t want to be forced to sell if the market is down.

The second factor is cash reserves. How much cash do you have on hand? If all your money is fully invested, with no extra cash to cover unexpected expenses or emergencies, that would pose a problem, especially if you have to sell when the market is down.

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. Everyone suffers!

Those factors are crucial considerations. But in the end, risk is like spicy food…you don’t really know how much you can tolerate until you’ve tasted it.

Are there other ways you assess your own risk tolerance? Leave me a comment below.

Filed under: Financial Wellness , Investing , Life Lessons , Women & Wealth

Comments & Feedback

  • Reply
    Mary Stephenson
    May 3, 2023 AT 4:00PM

    Got 15 dividend bearing stocks, 5 more to buy. Not a risk taker. Have studied investing for the last 4+ months. Made sure these stocks have been around longer than I have. 7 decades. I would say they are pretty safe. Can afford to have one or two fall off the deep end if it so happens. Still a very modest amount invested.

    Read something very interesting the other day. And I will translate in to my own words. The big guys buy when they are also saying to sell. They produce a false sense of what is going on and now I understand why the market has no reason to be so volatile. They make money when everyone else is loosing. Also read there is a government disclosure on what the million dollar investors are actually doing. No wonder why people are terrified of losing money.

    • Reply
      barbara huson
      May 5, 2023 AT 10:41AM

      I love that you’re building a portfolio of dividend paying stocks. Great idea. I can tell you’re studying and being cautious. But be careful of believing everything you read…there’s a lot of fake news out there.

  • Reply
    Lisa
    May 4, 2023 AT 5:57PM

    Hi Mary,

    Is there one stock you’re particularly proud of purchasing? You followed your gut feeling, then researched your gut feeling and it ended up being a great purchase.

    Telling people to sell, then buying sounds like market manipulation to me!

  • Reply
    Lisa
    May 4, 2023 AT 6:23PM

    I feel upset when I hear people tell me they’re going to delay investing until their “million dollar” business idea comes true.

    A few years later, yet again, that idea never eventuates and they have NOTHING to show for 3-4 years of working and no fortune. This is an example of low risk tolerance. Waiting until you “get rich” to invest, because you believe you have a very entrepreneurial mindset and not enough cash to invest right now.

    Entrepreneurial ideas are fantastic to have, but usually money starts to accumulate between 3-5 years of consistent investment. For some unknown energetic reason, big money and fruitation of ideas seem to happen to those who are consistent over the years. Ironically, these people can find a way to fly to Disneyland, but can’t find a way to put 2 grand away in a CD.

    • Reply
      Mary Stephenson
      May 5, 2023 AT 8:21AM

      Hi Lisa

      Can’t say anyone particular stock. I read a book on dividends which made sense. They talked about compound interest, with advice on how to pick a stock and some advice on which ones. Never the one with the highest yield and gave reasons why. Brother in-law confirmed my opinion on dividend stocks. He is living off of some. Just wish I had known about it 20 years ago. But since I was only making $3.30 a year on a $10,000 CD, decided anything would be better than that.

      And yes I agree with the market manipulation and it makes sense of how they can jump on everyone’s panic. Don’t have the money or the guts to follow those guys as once in a while they do hit a loss.

  • Reply
    Cara
    May 5, 2023 AT 3:45AM

    Thinking about risk tolerance. Close your eyes. Imagine you’re enjoying yourself in your favorite place, with your favorite people, doing your favorite things. Enjoying the moment fully.

    Preparing to pay for whatever you’re doing. How much are they demanding, $20, $150, $3400, $23000, …? (pay attention to the tightness in your chest when thinking about the amount). As you’re holding the money in your hand, the wind kicks up and abruptly pulls the money out of your hand scattering the monies down the beach or out the window. Looking at your guests and loved ones still enjoying themselves. Payment is being demanded NOW.

    How much did you lose? Can you reach into your pocket and pull out more money to settle the invoice? Or do you have to leave everyone, and everything you were enjoying, to chase the money down the beach?

    • Reply
      barbara huson
      May 5, 2023 AT 10:46AM

      Oh wow, Cara…that’s quite a powerful visualization and it definitely gets you in touch with your level of risk tolerance, on a visceral level. I really like it. Thanks for sharing this!!!

  • Reply
    Lisa
    May 5, 2023 AT 8:51AM

    Cara,

    Not sure what you mean, but sacrificing saving money to be broke is not an excuse not to save. It’s true you can’t get back time though, however there should be a balance between both!

  • Reply
    Lisa
    May 5, 2023 AT 8:58AM

    Sorry Cara,

    Meant to write I sacrificed saving money, because I spent time with my family on the beach is one of the many excuses I’ve heard people make when talking about not investing. There is a time and place for both. One shouldn’t have to be sacrificed for the other, just prioritized differently.

Use The Form Below to Share Your Feedback And Opinion

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.

Top Back To Top
Site Design Rebecca Pollock
Site Development Alchemy + Aim