- Time horizon: How old, or young, you are and when you will need or want to use the money is a primary factor in your risk tolerance. Generally, the younger you are, the more time you may have to recover from losses in higher-risk investments. The older you are, the more risk averse you may be, worried that you won’t have time to recover from stock market losses.
- Impact on lifestyle: The amount of money you are comfortable allocating to investments will contribute to decisions regarding your personal risk factor. If your lifestyle depends on the money you invest, your risk tolerance will be different from another investor whose money, if lost, won’t alter his or her day-to-day living.
- Knowledge of investing: Some riskier investments require an in-depth knowledge of investing and may not be appropriate for someone who has limited knowledge. The more investing knowledge you have, the more comfortable you might be with a more aggressive portfolio.
- Personal comfort level: Your natural inclination may be to be more aggressive, or more prudent, which can have an effect on your investment decisions.
Here are some examples of your investment strategies based on risk tolerance levels:
- Short-term/No risk: 100 percent cash/bonds
- Conservative: 70 percent cash/bonds, 30 percent stocks
- Moderate: 40 percent cash/bonds, 60 percent stocks
- Aggressive: 15 percent cash/bonds, 85 percent stocks
- Ultra-aggressive: 100 percent stocks