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Why It Is Important To Understand Your Risk Tolerance

By Author: Robin Schott
Total Articles: 21

Before you step into the stock market, it is important to know that risk tolerance is a psychological trait that is genetically based. It is positively influenced by education, income, and wealth, which means as these increases, risk tolerance appears to increase slightly. Risk tolerance is negatively influenced by age. For example, as one gets older, risk tolerance decreases. Basically, in simple words, risk tolerance is how you feel about risk and the degree of anxiety you feel when risk is present. Technically, risk tolerance is defined as the extent to which a person can prefer to take the risk. Generally, all humans vary in their risk tolerance, and there is no right balance here.

You must also note that the risk tolerance is also affected by your perception of the risk. Consider an example that flying in an aeroplane or riding in a car would have been perceived as very risky in the early days, but less so today as flight and automobile travel are common occurrences. Therefore, many of us will feel today that riding a horse might be dangerous with a good chance of falling or being bucked off because few people are around horses.

Thus, with this example, you will get to learn that the idea of perception is important, and especially when we are talking about investing. When you learn more about investments that how stocks are bought and sold, how much volatility is usually present, and the difficulty or ease of liquidating an investment then you will think that stock investments are not at all risky. You thought that it is damn risky before making your first purchase but once you know everything about it, you feel no risk in it. Thus, as a result, your nervousness is less intense, even though your risk tolerance remains unchanged as your awareness of the risk has changed.

In simple and plain concept, you can avoid those investments which are likely to make you anxious¸ by simply understanding your risk tolerance. Usually, you must never buy an asset that keeps you from sleeping in the night and makes you worried every time. It is believed that anxiety stimulates fear that triggers emotional responses rather than logical responses to the stressor. All such investors, who can be patient and follow an analytical decision process invariably comes out ahead, when there is a period of financial uncertainty. You can get more such unusual tips from the technical analysts of Money Classic Research, who are capable of generating accurate stock market tips.

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