Types of Investors

Risk tolerance is the amount of loss that an investor is willing to accept when making an
investment decision. Several factors influence how much risk an investor is willing to take.
Knowing one’s risk tolerance level assists investors in planning their entire portfolio and
influences how they invest. For example, if a person’s risk tolerance is low, investments will be
made cautiously, with more low-risk investments and fewer high-risk investments.

Factors that Influence Risk Tolerance

1. Timeline
   Based on their investment objectives, each investor will choose a different time horizon. In
   general, if there is more time, more risk can be taken. A person who needs a certain amount of
   money in fifteen years can take more risk than someone who needs the same amount in five
   years. It is because the market has shown an upward trend over the years. In the short term,
   however, there are constant lows.
2. Goals
   Individuals have different financial goals. Many people’s primary goal in financial planning is not
   to accumulate as much money as possible. Many people do not plan their finances solely to
   make the most money possible. The amount needed to achieve specific goals is calculated, and
   an investment strategy to achieve such returns is typically pursued. As a result, depending on
   their goals, each person will have different risk tolerance.
3. Age
   Young people should, on average, be able to take more risks than older people. Young people
   have the ability to earn more money while working and have more time on their hands to deal
   with market fluctuations.
4. Size of the portfolio
   The larger the portfolio, the greater the risk tolerance. An investor with a $50 million portfolio
   can take more risks than one with a $5 million portfolio. If the value of the portfolio falls, the
   percentage loss is much lower in a larger portfolio than in a smaller portfolio.
5. Investor level of comfort
   Each investor approaches risk in a unique way. Some investors are inherently more willing to
   take risks than others. Market volatility, on the other hand, can be extremely stressful for some
   investors. Risk tolerance is thus directly related to an investor’s comfort level when taking risks.