Types of Investors

Types of Investors

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.

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