How YOLO are You in Risk Tolerance?

Darryl Bachmeier
Sep 20, 2020
Finance


You might have heard of YOLO (You Only Live Once) or that mantra of people who are making the most out of their lives. Living in this principle prompts you to do extreme challenges and take risks to attain ultimate happiness and satisfaction in life.

Despite most people who regard this as a trend or “too illogical” to do, it can make us think about our risk tolerance.

Generally, risk tolerance is our ability to take in uncertainties in life. This entails our level of patience in a waiting game and in making decisions. During waiting, we constantly evaluate as to whether to hold on or let go of something that will impact the way we achieve our long-term goals.

The term risk tolerance is mostly associated with investing. It is the measure of how strong can you hold on to an investment for potentially greater gains. Your decision lies in how much risk you can wallow in investing, which is based on the combination of gut feel and data-based insights.

Just like the people in YOLO attitude, the higher your risk tolerance is, the greater the potential rewards at stake. Most investment vehicles are structured this way.

Risk tolerance always constitutes both a loss and a gain factor. The market will provide us as much data about trends, market performance, and other pertinent information about a certain investment. But no one can guarantee the degree of certainty when it comes to its volatility. We can only make assumptions, better yet, we can do the math or take expert recommendations.

How Do You Gauge Your Risk Tolerance?

Financial advisors devised a way to accurately gauge your appetite and tolerance for risk. By answering some questions, they can match you with the right investment vehicles that satisfy your end goal and puts more confidence in you to hold on to it. This way, you maximize the opportunity and the value out of them.

In the same way, gauging your risk tolerance also shows where your fear lies most. This insight can either compel you to avoid these investments or learn more about them to improve your tolerance level. Sometimes, fear only comes from not having sufficient information about it. By addressing your fear, you are widening your opportunities in investing.

Here are some of the questions you will be asked about:

  • What are your financial goals 5 to 10 years from now?
  • How much money are you willing to lose in investing?
  • Which concerns you most, losing money or losing purchase power?
  • How often will you be tracking your investment status?
  • How much loss can you tolerate before pulling your investment out from the market?
  • Will you buy more stocks when the market is down?

Can You Control Risk?

The good news is, you can have some power over risks. While the uncertainty factor remains intact, you can make better financial planning by doing some measures when it comes to risk.

Understanding risk management may help you expand your risk tolerance. This is where you make multiple investments at once to offset losses in some or maximize your gains for the rest. Diversification is just one of the risk management strategies you can do.

Continuous Investing

Part of risk tolerance is your capacity to make investments in terms of how much or for how long you will hold them. If you want to manage the risk in terms of holding period, you can instead invest in increments.

Committing a fixed investment monthly can help you control the risk of losing a lot of money in an unlikely event. It also makes the whole investment period more manageable since you won’t be shelling out a chunk of payment at once.

Committing a portion of your income consistently can help you maximize your buying power that is driven by the price at the moment. As you build your portfolio, it also becomes a perfect opportunity to study the market.

Another key to investing continuously is choosing the right companies to invest in. Rely on those that operate in a more stable industry or have consistently high performance over time to sustain the growth you need for your long-term investment.

In dollar-cost averaging, the best approach is to make consistent investments over a long period for you to realize as many returns. Realizing its benefits may take you years of investing. Make sure that the goals you set for this investment are longer, say, for retirement or as an education fund for your younger kids today.

Final Thoughts

Identifying your risk tolerance can open a lot of opportunities for you to grow your money and make it work for you. After knowing your level, commit to financial literacy to take advantage of the insights. This way, you do not let fear take away the opportunities for you to prepare for the future.

Risk management can help you increase your risk tolerance. Knowing that you can have some control over your gains can help you make bolder decisions and reap better rewards.

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