Can You Handle the Investment Risk?Make sure your risk tolerance and investment strategy align.
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As entrepreneurs, we pride ourselves on being risk-takers. But when it comes to investing, we tend to be protective of the money we've worked so hard for. That's why, when the Dow Jones industrial average plunged 22.1 percent in eight trading sessions last October to its lowest level in five years, even the bravest investors started dumping shares and fleeing to the safety of cash.
The reality is that no investment--not even a blue chip company like GM or IBM--is 100 percent safe, and investors who put their money in the market, hoping to average an 8 percent to 10 percent return, risk losing their entire investment if the market goes south and the company files for bankruptcy. Unfortunately, investors who panic when the market collapses, hoping to jump back in when the market rebounds, generally end up losing their initial investment as well as the opportunity for upside. Trying to time the market is a surefire way to watch your nest egg shrink to zero.
So while nobody likes volatility, you need to establish an investment strategy that sees you through good times and bad. The first step is to assess your personal tolerance for investment risk. Are you young and single with no kids and 40 years to go until retirement? Or are you married with teenagers approaching college and aging parents who need your help? Do you need your investments to generate an income stream until your business is more established, or does your business kick off excess cash you can add to your investment account every month?
