Financial planning based on Risk Tolerance
Risk tolerance is an important factor when dealing in investment products. This level is determined by going through an individuals profile and percentage of total investment is set as his risk amount. Let’s say, the risk tolerance level derived for an individual is 30%, now if he invests $10,000 then the amount that he is willing to put at stake is $3000. Considering the investment is made in equities and then if the value of his portfolio drops to $7000, it means the risk tolerance level has been hit and he should withdraw his investments so as to avoid further losses.
Financial planers can help an individual in determining his risk tolerance level by studying various factors such as age, annual income, savings, other investments, insurance and credit rankings.
Investors with low risk tolerance are never advised to take equity exposure as wild fluctuations in the markets can always test their tolerance levels. Such investors are recommended to construct 80% of their investment portfolio with bonds and CD’s, and the remaining may be mutual funds.
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