Risk handling by an investor very much depends upon his age. If the investor is an old person then he surely cannot take much risk in comparison to a younger one. A young investor has longer time frame to invest the money and can wait a few extra years than first anticipated for the profitable returns to start pouring in.
However this theory may not be right in every case e.g. if an investor is around 60 years of age and has sufficient amount to spend for remaining lifetime, live luxuriously after retirement, then he can invest interest from pension amount in stocks and take higher chances with his money.
If age is not the criteria and you are planning to invest for short term, then stocks can be way to riskier than any other investment option. The longer the time frame, lesser is the risk, when investing in stocks. Ideally, stock investments should be made for a time frame ranging between 2-10 years, the more the better it is.
The two most important factors which determine the level of risk tolerance are net worth and available risk capital or liquid capital. Net worth can be defined as the amount of assets left after deducting liabilities. Risk or liquid capital can be defined as the amount which can be invested easily and doesn’t affect the normal life of an investor.
An investor with high net worth and plenty risk capital can tolerate the higher level of financial risk as compare to someone living on rent and relying on salary. An investor who invests lesser amount of capital and faces loss can recover quickly in comparison to an investor who has invested his complete capital.
What’s your Purpose behind taking all that Risk?
What is the main purpose of investing the money is another determinant of risk bearing capacity that an individual holds e.g. if investment is made merely to earn extra profit then risk tolerance will be higher on the other hand if investment is made for child’s education then no one will be interested in taking higher risk.
An investor should always judge his risk tolerance on the basis of his previous experience in dealing with financial market investments. This factor involves lots of aspects such as if he is new investor, if the sector is new in which he is investing, and so on. It is recommended to get some professional tips and guidance and some experience before investing large amount of capital in the stock market.
In conclusion, an investor can determine the level of risk he or she can handle by observing above mentioned factors. All these factors enable an investor to manage higher level of risk with efficiency.