Risk tolerance considers how your emotions affect your investment-making decisions. You should assess whether or not you’re prone to worry over fluctuations in the market, or if you tend to make poor financial decisions when faced with large financial loss or gain. It’s important to determine if you will stick to the plan based on your time horizon and current assets or make changes if the market is volatile.
As you’re building your own portfolio, you can also ask yourself the following questions:
- Will you immediately sell when there is a market panic?
- If you see a particular investment performing well, are you inclined to invest all of your money into that one holding?
If you answered yes to any of the above, it’s important that you choose a portfolio that will not be too volatile in the short term. It’s better to sacrifice a bit of long term return than to let your emotions entirely affect your investment decision.
See this article to learn more about other factors to consider when building a custom portfolio.