Debt and Taking Risks
Once you have made the decision to begin a savings plan, you may become overwhelmed by the shear amount of investment opportunities that are available today. One important area is how much risk you are willing to accept, which is generally referred to as your Risk Tolerance. A basic fundamental of investing is that the potential for high payoffs is almost always linked to higher levels of risk. Your ability to tolerate these risks will greatly influence the type of investments that you make and may impact such your retirement planning, education savings, and levels of debt. With so much at stake it is very important to determine the level of risk tolerance that you possess.
Are you willing to accept a loss? If the answer is yes then this is a clear signal that you have a great tolerance for risk. This could increase your investment options considerably. Stocks go up and down, but certificates of deposit and certain bonds offer a guaranteed rate of return. How long are you willing to sustain a loss? The longer you are comfortable holding onto an investment that is losing money the higher your tolerance for risk. Do you demand high performance at all costs? This would be an indicator of a high risk tolerance. High performance and high risk go hand in hand. Once you understand what your tolerance is you will feel much more comfortable making informed investment decisions.
Consider changing your goals if you are looking for aggressive long range returns but have a very low risk tolerance then. If you decide to stick by your tolerance level then be aware that your goals may need to be adjusted. Consider the length of the investment. If you are looking for long term growth but are wary of high risks then remember that the length of time decreases the overall risk. Time allows an investment to rebound in the event that it suffers a loss.
Always consider the effect of inflation on your investments. At times a conservative approach may end up carrying the largest amount of risk. This sounds counterintuitive, but it is true none the less. If a conservative investment does not grow at the rate of inflation than this equates to losing money. Consider a more aggressive goal.