Knowing your risk tolerance goes far beyond being able to sleep at night or stressing over your trades. It’s a complex process of analysing your personal financial situation and balancing it against your goals and objectives. Ultimately, knowing your risk tolerance and keeping to investments that fit within it should keep you from complete financial ruin.
Therefore never invest more than you can lose
You don’t want to put your finances at risk by buying things or making trades you can’t actually afford. Aspirational thinking is great aspirational buying isn’t. And remember, you need money to make trades in the first place. If you wipe out your money on a trade you couldn’t really afford, you won’t be able to take advantage of the next truly hot stock that comes your way.
Get out of trades when they don’t go your way
Following this rule, will save you much more in avoided losses than you would gain by staying in trades whose growth you didn’t predict. Yes, watching a stock you’ve sold climb higher, maybe hard. But putting this rule in place and following it all the time is the best. As it’s a way to protect yourself from the downside risk of big losses on unpredictable trades, even if it means taking a smaller profit on a stock that’s trending up, just because you didn’t expect that movement.
Spreading your risk around
Even if it’s all high risk, decreases your overall exposure to any single investment or trade. With appropriate diversification, the probability of total loss is greatly reduced. This comes back to preservation of capital.