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
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.
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.
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.
- 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.
- 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.