Investing Questions Everyone Wants to Know (Part 2)
It's back for your enjoyment - even MORE investing questions answered that you were too afraid to ask. As always, if there is any topic that has been lightly covered, or needs clarification, or if you have any of your own questions to ask, please keep SENDING ME YOUR QUESTIONS HERE. I love hearing from readers!
Isn't it considered risky to pick out all your own stocks?
Yes, but you could also say the same thing about having someone else pick your stocks for you. No one has a crystal ball that will tell you which stocks to buy and sell, and none of us has a DeLorean to help us get our mitts on a newspaper in the future. (However, if you do have these items, let's talk.) Many articles will argue that it's just not a good idea for investors to make their own stock picks. They come to this conclusion because they note that picking stocks is SO hard for professionals therefore it would be near impossible for individual investors. I say - BULL! Whose advice would you rather take? Yourself, saying I want to buy Nike (NKE) because it's a safe company, everyone knows it, and I own 20 pairs of sneakers; or a professional broker saying you just "have to trust him on this one" tell you to put a massive amount of money into a tech stock that could either go WAY up or WAY down? Go with your gut, but remember that investing should be an educated guess rather than a shot in the dark. If you really take a look at the world around you and use your brain, you'll be totally fine.
What exactly is "risk tolerance?"
Risk tolerance is essentially how much risk you're willing to put up with in your portfolio. It's important to note that risk tolerance is completely different for each and every investor. If you have a lot of money to play around with, odds are you risk tolerance is pretty high since you can take heavy loss hits. If you only have a few thousand dollars saved up for retirement, odds are your risk tolerance will be pretty low because you can't afford to lose money. Before you ever take a stab at investing for yourself, it's imperative that you know and understand what kind of investor you are by know what your risk tolerance is - no two investors will have the exact same situation.
How can I figure out what my risk tolerance is as a new investor? I have nothing to compare it to.
Not a problem! You can obtain a quantifiable level of your risk tolerance through a series of quizzes - you can find a lot of these online, OR YOU CAN CHECK BACK ON GRADMONEY NEXT WEEK for a NEW quiz. There are plenty out there to help determine if you are a more aggressive or conservative investor. Just remember that risk level has many dimensions and is not linear at all. Your time horizon for investing is important - 1 year versus 40 years - and the closer you are to really needing the money - as in you are retiring or making a large purchase like a house - your risk tolerance should swing in a more conservative direction