I bought my first stock in early 2010, which costed me something thousand dollars. Yes, that was my entire life savings at the time! Several days after I bought it, it dropped several points and I was sitting on a paper loss of $400. I logged into my brokerage account, noticed that my stock numbers were bleeding red, closed the browser and swore off investing for a long time.
Thank goodness at the time I had the heart to not sell and lock the losses! I guess deep down, I still had hope that my investment would eventually recover and perhaps even make money!
Since then, that investment has more than doubled. Today, my portfolio fluctuates in the thousands and I wouldn’t bat an eye. I hope that in the distant future, my portfolio may even fluctuate in the millions! Hey, we can all dream can’t we?
“That’s great Savvy Buck! I want to get into stock investing but I get really skittish if my investment drops a few hundred dollars! How can I build my risk tolerance?”
Here is how you can build your risk tolerance: Time!
Like anything in life, be it weight loss, bodybuilding, or learning something new, it takes time to develop and perfect it. You cannot expect to give someone $5 million dollars and expect them to suddenly drop it on all a bunch of stocks just to see drop to $3 million the next day due to a recession.
I reckon for majority of wealthy investors, they, too, started from very humble beginnings. They saved up a few thousands dollars, read a few books about stocks, and slowly dabbed into the market.
They would put $2,000 into a stock or index, see it go up to $2,400, see it go down to $1,800, and see it crawl up to $3,000. They would get comfortable, and take another small step and purchase another $3,000.
They would slowly learn about earnings report, after hours/pre-market fluctuations, P/E ratios, S&P 500, DOW Jones Index, and general market sentiment.
All of this knowledge is part of an essential foundation for a high risk tolerance. If you were confident that Starbucks had a great business, is continually innovative with new product offerings, and people loved their daily dose of coffee, why in the world you even think of selling the business in 2009 when it went down to sub $10 a share? (FYI, today Starbucks is over $70 a share)
My advice for those who wish to build their risk tolerance:
1. Start immediately.
Those who haven’t begun investing yet and scared to stick their toes into the water…start immediately! Buy a couple of blue chip stocks or diversified index funds. Get comfortable with the daily fluctuations early on.
2. Start in baby steps.
Again, you cannot expect someone to suddenly drop hundreds of thousands of dollars into the market if they’ve never invested before. They need to invest immediately, but more importantly, invest slowly. When you are comfortable with fluctuations of $1000, then you can slowly get comfortable with fluctuations of $2000, and so on.
3. Continue consistently
This is an obvious third step. Once you have a solid foundation of the first 2 points, you should continue to consistently invest. Eventually, you will reach a point that your money will work for you.
Good luck and happy investing!