If youve ever been involved in any type of personal or professional growth counseling, you are probably familiar with the phrase stepping outside your comfort zone.
This is when you are encouraged to take a risk and try something that might seem challenging either emotionally or professionally.
Know Your LimitsWhile some risk-taking may lead to personal or professional growth (or not), it can be disaster in the market if you dont know where your limits are.
Investing is all about taking risks; however, you know the risks are calculated relative to the potential payout. Every reasonable investor has a limit to their risk tolerance and the smart ones know where that limit is and dont stray past it.
Bad things HappenSeveral things can happen when investors stray past their risk tolerance level and theyre all bad. How do investors get themselves in trouble? Here are several ways:
- They make a bad decision and refuse to admit they were wrong, so the problem just gets worse.
- They invest more money than they can afford in a stock(s) that now dont seem like such a good idea.
- They bought on margin and shouldnt have and now they cant sleep.
- They bought a stock that someone talked them into even thought they didnt really understand the investment.
How to Avoid this MessInvestors can avoid these problems if they will simply know where their level of risk tolerance is. It is easy to find.
All you need to do is listen to that knot in your stomach to know if you are stepping over the line. Here are some practical tips:
- Never invest in anything you dont understand. I dont care if your neighbor thinks this is the hottest thing since Poptarts. If you dont understand it, let it pass.
- Make sure the money you invest is not needed to pay the mortgage. Investment funds come after you have covered the necessities.
- If you are not completely comfortable with margin investing and fully understand the risks, dont use it.
- If you buy a stinker and it is always going to be a stinker, take a small loss rather than letting it become a big loss. There is no shame in making a mistake, but it is foolish to let it become a disaster.