Risk Management

 


 The first step an investor could take to determine their risk tolerance is to define their financial goals. For example, common long-term investment goals may include saving for retirement or building wealth for future generations, while short-term goals may include purchasing a car or pursuing higher education in the near future.


These goals may have knock-on effects on risk management and tolerance because financial goals could dictate an investor's time horizon, which is the length of time they plan to hold their assets before cashing in on them. 


The longer the time horizon, the bigger the risk an investor may take, as long-term gains may counterbalance short-term price dips. Entering the market with shorter time horizons, such as planning to buy a house in two years, means losing a portion of the capital to short-term price fluctuations could set this goal back significantly.


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