Risk Tolerance

Risk Tolerance is described as the willingness an investor has to withstand the inevitable fluctuations in the value of their investments. Every investment comes with a certain degree of risk or chance that the investment will result in a monetary loss instead of a gain. Risk Tolerance is the amount or type of risk an investor can afford or is willing to tolerate. For example, purchasing real estate can be extremely profitable. An investor can make improvements and resell the property at a much higher price. If property values are on the upswing and the resale takes place during a seller’s market, the property may sell for double or triple the original purchase price. The investor can also rent the property, generating a steady income that can lead to significant profits. On the other hand, there is a chance the real estate market can go bust and the investment is a loss. Investors may find their property suddenly valued at significantly less than what they paid, even with improvements. An investor should always know the risk, not only the percentage but the impact. For example, chance of values decreasing can be 10%, 30% or 50%. A 50% risk may be tolerable to investors who can pay for the property in full and rent it, but not to those who will have a high mortgage that rent may not cover. Those investors may not purchase property, knowing the risk is too great. Generally, investors with other assets who can afford to wait out the market have a higher Risk Tolerance than those who don’t.