Financial Goals And Risk-Tolerance Levels Are Different From One Person To Another. How To Define Yours?

Financial Goals And Risk-Tolerance Levels Are Different From One Person To Another

. How To Define Yours?

When investing you should how many years you have to invest and what kind of risk you are willing to take in order to achieve your results. These two factors will be constantly weighed one against the other when you are investing and/or trading. You might have in front of you a big opportunity for a big gain, but one that entails a far larger risk than you want to be having. Plus, when looking at your financial goals, you realize you do not need that much gain in such a short time in order to achieve your goals.

That might seem farfetched, but this is what happens every day, to every trader on the markets. Taking the time to properly set a financial goal will help you a lot when making decisions about a particular trade. Do you see how that works? Your financial goal, that is set 20 years ahead, will be aiding you to decide on a trade that is meant to be over next Friday! You are analyzing a trade with different timeframes in mind thus enhancing the chances that you might be successful at it.

Let me give you an example of a trade that I have been through and something similar to the story above happened: I was looking at a covered call trade from two different securities. Once could yield a 5% a.m. return but with much greater risk. The other would yield a 3% a.m. return with way less risk. Upon looking at my 10-years financial goal, I realized that, in order to achieve it, I only needed it a CONSTANT 3% a.m. return on my equity. Why would I risk more than I needed if with a 3% return I would be on the road to achieve my goals?

You might argue that if you can, you will try to earn more and that is a common argument. But, realize that the other trade with a 5% return had a higher risk and in the end, it turned out sour. So, by being LESS greedy, I was able to earn more money. "But 5% is more than 3%!" Right. If both came out successful, that is true. But the 5% trade had higher risk and did not come out successful. So, which one would you choose: a win on a 3% return or a loss on a 5% return?

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