Risk Tolerance and Controlling Your Emotions

Risk Tolerance and Controlling Your Emotions

Investing is a game of logic and it requires discipline, critical thinking, analysis, and patience. Contrary to what many other people think, investing is not the same as gambling. When you’re gambling, you only bet based on mere chance. However, investing requires you to scrutinize and plan the investment decisions you make. They’re worlds apart.

And since investing is game of logic, it goes without saying that emotions can disrupt the process of making wise investment decisions. Most of the time, emotions ruin an investor’s investing career. It is difficult to think rationally when you’re panicked or fearful. However, emotions can be countered by developing good habits.

The following will help you determine your risk tolerance and control your emotions to make wiser and better-informed investing decisions.

Understanding you Risk Tolerance

While it is believed that risk tolerance is genetically based, it may also be affected by the surrounding, society, education, and experience, the last of which has tremendous impact on one’s risk tolerance and willingness to risk exposure. In addition, the older the person gets, the less he is willing to take risks.

And when we say risk tolerance, we refer to the amount of risks you are willing to withstand in exchange for a reward. For instance, would you risk 100 dollars to win over 1,000 dollars? Or would you rather risk 1,000 dollars for another 1,000 dollars?

There are no right or wrong answers since different people have different levels of risk tolerance. There is no “right balance.”

Risk tolerance can also be different by the investor’s perception of risks. Some investors may find one asset risky, but another may find it not as risky as another asset.

Perception of risk is very important in the investing world. The more you know about an investment’s volatility, how it is sold and bought, and the other stuff that happens to it, the less likely you’ll perceive it as risky. The more you know about it, the more you can control it. And the more you can control it, the less risky it appears to you.

If you understand your own risk tolerance, you can veer away from those investments that can likely cause you stress and anxiety. In general, clearheaded investors invariably survive economic uncertainties and Forex Broker Review market crashes relatively unscathed.

Controlling Your Emotions

This is perhaps one of the biggest problems that an investor may have to face. When you’re one on one with your emotions, you will most likely lose. Too much emotion in investing makes an investor go for illogical decisions.

Remember how the HQBroker Review stock market works. When investors feel good about the company’s stock, the value of that stock increases. When investors feel worried or uncertain about the stock’s outlook, the value of that stock decreases.

Investors who feel good about the market are called the “bulls” while those feeling the opposite are called the “bears.”

So, if the stock market is run by investors’ tangled emotions, the best way to beat it is to find a logical and systematic approach.

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