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Taking Stock of Your Risk Tolerance

May 10, 2011 10:31 AM ET
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

In the latest unemployment numbers, the US Bureau of Labor Statistics reported that Nonfarm payroll employment rose by 244,000 in April and the unemployment rate edged up to 9.0 percent. Although the economy created 244,000 thousand jobs, the unemployment rate still increased. However, the recent numbers still gave the markets a nice boost on Friday, May 6, 2011.

However the day before, Thursday April 5th, there was this massive stampede of investors out of commodities, sending many benchmark indices and the respective funds and stocks that are pegged to these indexes down to levels not seen since 2008. This brings me to the issue in this article- determining your risk tolerance.

Accurately determining your risk tolerance is one of the most important steps that you can make in managing and building your investment portfolio over time. Determining your risk tolerance helps you avoid the nervousness and feelings of dread that you may feel when the overall market takes a nose dive, normally caused by the stampeding herd of investors trying to exit a particular investment. It’s nice to take a flyer every once in awhile, but a long-term disciplined approached tailored to your specific risk profile is the only way to go.

What is Risk Tolerance? Risk tolerance is the amount of risk that an investor is comfortable taking, or the degree of uncertainty that an investor is able to handle. Risk tolerance often varies with age, income and financial goals. However, there is also another component to risk, namely "risk capacity". Risk capacity, unlike tolerance, is the amount of risk that the investor "must" take in order to reach his/her financial goals. These two concepts should be carefully considered before you invest.

The first step in determining your risk tolerance and your capacity for risk is first determining how much money you need and the time frame you have left for reaching your income goals. Starting with a financial plan is also important. A good financial plan is a sure way to start and can help you achieve your financial goals more accurately and safely. Be honest with yourself, does it bother you when you here the news on how much the markets closed down? Will it bother you if your account with treasury bonds, “the safest investments on the planets”, lose value, because they will, if interest rates increases; sometimes, just because you have safe guaranteed investments does not mean that there are no risks involved.

Of course, if you still can’t figure out where you stand, diversification is a simple step in helping you reduce your overall investment risks. Diversification is a strategy that minimizes overall portfolio risks. If your risk tolerance is not where it should be in relation to the positions that you own in your portfolio we can help. We offer professional financial plans that can help you build and allocate a portfolio of investments based on your correct risk tolerances or profile. Please call to speak with an advisor at 1-877-788-1732 or when you call just ask for Rick.


Here are three web links that takes you to pages with short risk assessments and calculators. I am not endorsing any but I find them interesting.

Link: www.calcxml.com/do/inv08- Calcxml
Link: www.kiplinger.com/tools/riskfind.html- Kiplinger
Link: moneycentral.msn.com/investor/calcs/n_ri... - MSN-MoneyCentral

So the next time a segment of the market takes a dive, you won't feel like diving with it also.


By Rick Walter, RIA

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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