What is risk tolerance?
There are many different investments a person can get into or pursue but before you make any type of investment, give yourself a risk tolerance assessment. What does this mean? It means, that as an investor you should have a good idea about how much risk you are willing to take, versus the reward for making the investment. Give your self an assessment based on the risk you can tolerate.
How do you do this? It’s simple, just ask yourself a couple questions.
- Is your tolerance for losing money high or low and is the reward high or low?
- When you have lost money in the past has it made you really upset or were you kind of bothered by it for like 20 minutes and then decide to move on with your emotions?
These are examples of questions you should probably ask yourself first, so you can gauge where you are with your investing risk tolerance. If you are bothered by the fact of 
losing money for longer periods of time, then you probably have a low tolerance for risk which means you should stay away from Riskier investments. Things like day trading for example is a high-risk game and so are shorter term investment strategies like swing trading.
Don’t get discouraged if you do not know what swing trading is. We will cover these types of terminology later if you are not familiar with swing trading or any other financial investment terms that are used in this article. Once you have a good understanding of your risk tolerance, the next step is considering what types of asset classes and strategy best fit your risk tolerance.
Risk management with assets
When you are looking to make any type of investment you might want to look at what asset class the investment is associated with. For instance, if you are wanting to invest in a stock, that stock is in the “paper asset” class. There are many different asset classes to choose from and more importantly, it’s wise to research the investment to figure out where the product or service aligns when looking at the asset class.
Why would this matter? It matters because some asset classes have a higher risk associated with them. A good example is investing in a single company and buying shares of its stock. Take company XYZ for example, let’s say you buy 1,000 shares of company XYZ as your investment choice.
The risk associated with investing in a single company is very high if you don’t know what to look for or know anything about investing in a single stock of a company. You should take into consideration that a company has a lot of moving parts, especially companies that are open to the public to invest in through their stock.
A company has employees, management, operations, a finance department and the list goes on. These moving parts are completely out of your control and if one of these moving parts goes belly up or encounters problems it can drastically affect the price of that stock that you are invested in.
Just look at the headwind news that has come out on companies like Facebook and Wells Fargo and the affect that had on their stocks for 2018. Facebook lost 25% of its value in a single day. If you are someone who has a low tolerance for risk and losing money and you were invested in Facebook, there is a good chance you sold in fear of the price going down more.
We are not saying that is what everyone did when they saw the stock tank fast but a lot of people sold Facebook stock trying to get out because they weren’t aware of their risk tolerance. This happens quite often in the stock market when you invest in a single company stock, so therefore paper assets can be very high risk if you don’t have a strategy for dealing with that risk.
Reducing risk with a risk management strategy
A more conservative and lower risk approach with paper assets or stocks could be investing in something called an Index fund. This diversifies your risk so that instead of owning just 1 company, you are owning an entire market of companies. Another ward if you experience another Facebook moment and you are invested in an index fund instead; you as the investor still own Facebook but you own the entire market as well.
For example, if you invested in the S&P 500 Index fund you are still invested in Facebook but you didn’t suffer the 25% drop that Facebook experienced because you are spread out and invested in other companies in different markets as well.
The point here, is that you can invest in an asset class and depending on what strategy you use, you can reduce your risk of losing money significantly while still reaping the rewards. This might be an ideal strategy for someone who has a low tolerance for risk. 
If you have a high tolerance for risk then you might be someone who wants to buy and sell a stock like Facebook. Buy it now that it has taken a 25% drop in price and pray it doesn’t go down more. If it heads back up then you could potentially make a good profit if you sell at the right time. The risk with this strategy is higher risk because you as the investor don’t really know 100% what the stock or company is going to face here next week or the week after.
Conclusion
These are just two examples of paper assets that have two different investing strategies. One of them offers low risk and a conservative reward and the other example is higher risk with higher rewards. It’s simply up to you as the investor as to what type of investment you want to get involved with but before you do anything, know your risk tolerance, risk associated with the asset class and have a strategy in place to accumulate your wealth.