What is Risk Tolerance and Diversification?
In regards to an investor, risk tolerance is the degree of uncertainty that an investor can handle in regards to a negative change in the value of his investment portfolio. Investment Risk Tolerance is a life factor that influences the mix of asset classes one would hold. This may vary according to a person’s age, their financial goals, and their income needs. Where and how one invests depends on how they feel about investment risk, how much downside market fluctuations can be tolerated and how much they expect to profit when the markets are going up.
We gauge clients’ risk tolerance into categories, such as Conservative, Moderate Conservative, Moderate, Moderate Aggressive and Aggressive. Once our investment advisor classifies a client to a particular category, based on the client’s input, the investing corresponds directly with this category.
A technique of risk management is diversification. A mix of a wide variety of investments can offer lower overall risk, depending upon the investments chosen. Diversification attempts to lower overall risk. One concept behind diversification is that, when there is positive performance in some investments within a portfolio, there may be offsetting negative performance in other investments within a portfolio. This being said, the amount of diversification within a portfolio may also depend on ones risk tolerance.
