Each person has his own risk tolerance level and there is no magical risk tolerance formula that works for everyone. However, there are 2 important considerations to consider: one’s time horizon and one’s bankroll.
Before investing, one should consider his time horizon, the amount of time that he can keep his money invested. If you have $10,000 to invest, but will need it in one year to buy a car, then it is better not to invest in high risk stocks. The riskier an investment, the more volatile it is. The price fluctuates greatly and you may have to wait a long time before you can sell at a profit. If your time horizon is short you may have to sell your stocks at a loss just to get the money when you need it. Investors with a longer time horizon can wait out investment price falls until the price rises again. Then one will not be forced to sell at a low price, but can wait until he has the opportunity to sell at a profit.
Bankroll
Figuring out how much money you can afford to lose is very important to risk management. If you only invest money that you can afford to lose or to have invested for a long period of time, you will not be forced to sell investments to cover current needs. You will be able to wait until the price is right and then sell at a profit.
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