To build wealth, you need to improve your finances through carefully planned investments. Investments are the only way to multiply your money fast and do it even quicker; you should be ready to take some risks by trading in stocks, feels Peter DeCaprio. Some might think that saving money is another way to become prosperous, which is only partially true. Hoping that the savings will grow on their own will only make the cash lose its value due to inflation which could belie your hopes of becoming prosperous someday. Instead, by investing the savings, you can multiply the money faster and beat inflation, thereby helping you build wealth.
Any investing comes with its own set of challenges, and investing in stock markets is indeed quite risky. Putting your money in the stock market could make you lose some investment, but the gains are also quite attractive.
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Therefore, before investing in stock markets, understand how much risk you can tolerate. The risk tolerance regarding investments depends on the individual because some people might be ready to take high risks, some might be comfortable dealing with moderate risks. In contrast, others might be completely averse to risk. The last-named group is not at all fit for investing in stocks and equities.
What is risk tolerance?
Losses are inevitable when you invest in the stock markets but how much losses you can withstand without feeling hurt determines your level of risk tolerance, explains Peter DeCaprio. The risk tolerance level is different for different people, although many people more or less have the same level of risk tolerance. Therefore, it becomes clear that you cannot copy the investment portfolio of another person because it could mislead you and prevent you from achieving your investment goal.
Ascertain your risk-taking ability
Before determining the extent of risk that you are ready to tolerate, you must first set your financial goals, like the size of the investment and the timeline of growth or how much time you can allow for the money to grow. It will help to understand how much risk you can take on the chosen assets. To set your financial goals, set a target for the wealth you want to create over a certain period, the purpose of saving, how long you want to make money last and when you plan for partial or total withdrawal.
By the thumb rule, the more prolonged investment allows taking more risks because you get the time to attempt to recover from losses if the market slumps significantly. Planning to use the funds for making a down payment of buying a home should allow you to invest for at least five years and thereby accept the risks. Still, if you have a shorter investment period, the risk-taking ability decreases proportionally.
Consider how comfortable you are with the results
The stock markets are highly unpredictable, except that losses can happen anytime. Humans have a strong aversion for losses and any loss, no matter how small it might be, hurts them more than gaining the same amount.
Consider how comfortable you are in accepting a chance outcome compared to a guaranteed result because of your perception about these points to your level of risk tolerance.
