When you invest in the stock market most financial advisors will ask you about your risk tolerance. What is risk tolerance? It is basically how much money are you comfortable with losing. How much can you tolerate your portfolio being down? This week has tested the risk tolerance of all investors, myself included. Many of us have lost money this week in the market. Why take the risk?
Often reluctance to the market is based on the concept of risk tolerance. Some assume playing the stock market is like putting your money into a slot machine. Whenever I am in Las Vegas I see people stay up all night playing the slot machines in hopes of growing their money. On the rare occasion some win but more often people lose money in Vegas. How is playing the stock market different than just putting your money in a slot machine in Vegas?
The key difference is portfolio and insight. A stock portfolio is basically spreading your money across several investments in the market to reduce risk. In addition, you can research historically how a particular stock has performed year over year and gain insight into its growth potential. With a balanced portfolio although one stock you own may be down, another one might be doing well enough to balance out the money you are losing. There are times when your portfolio as a whole can be down.
Imagine if you had historical data on how a particular slot machine has performed over a period of time. You never will in case you are wondering. With the stock market on the other hand, you put your money in with valuable insight. There is still some riskâyou can tolerate it more however because of what you know about your investments. Investing in the stock market is more tolerable when you view it as long term investing.
So why take the risk? A balanced portfolio based on your risk tolerance will hopefully grow over time even though it may be down at a particular time like this week.
