Understanding Risk Tolerance

Risk Tolerance pic

Risk Tolerance
Image: investopedia.com

After graduating with an MBA from Dartmouth’s Tuck School of Business, Tony Ehinger enjoyed a career in the finance sector and recently retired from the investment division of Credit Suisse. As a finance professional, Tony Ehinger had to have a solid understanding of balancing risk tolerance with investment objective.

A term used in the finance sector, risk tolerance describes an investor’s comfort level with the ups and downs of the market. Descriptors for risk tolerance include conservative, moderate, and long-term, and each of these has a corresponding investment objective.

If an investor gets nervous thinking about the volatility of the stock market, his risk tolerance likely falls into the conservative category, meaning he will take a lower return in exchange for a lower risk. Moderate investors may be willing to diversify their portfolio with some volatile opportunities, hoping to be rewarded with returns that outpace the market. Lastly, investors with a long-term risk tolerance plan have a time horizon of at least ten years. They accept the daily rigors of the stock market, knowing that significant profit in the market often requires higher risk.

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