Risk is a factor in every investment decision that you make, and your tolerance for risk is an important consideration, when making decisions alongside your trusted financial professional. Risk tolerance is balanced against your time horizon: the time between now and when you anticipate needing your money.
But is it possible to avoid a loss? No, not completely, but you can take steps to manage that risk, when investing. This is where conversations about your tolerance are critical.
What would you rather have: $500 right now or a 50% chance at $2,000? Many people go for the $2,000, and rightfully so. Since you have a 50/50 chance, a decision tree shows that the $2,000 answer carries a potential value of $1,000.
But let’s add a few zeros and see if that changes your perspective.
What would you rather have: $50,000 right now or a 50% chance at $200,000? The decision tree says the opportunity to win $200,000 offers the highest potential value. But, in reality, many people second-guess that decision because $50,000 is a lot of money.
Remember, there are no correct answers to these questions. They are simply meant to help you better understand the concept of risk.
All investments carry some level of risk, and while risk can be managed, it cannot be entirely eliminated. In general, the greater the risk an investment carries, the higher its potential return.
Risk happens, but don’t let it stand in the way of your dreams. Ultimately, these concerns should only serve to inform you and the questions that you ask the financial professional you are working with. These conversations should include your questions about the risks for each strategy presented as well as questions from your professional about the investment goals you want and the aspirations you hope to realize.
