If served a plate of risk, how much can you eat? How much money are you willing to lose? Risk is tolerating the potential for losses. You take a risk every day from the moment you step out of the house. In the same way, you risk losing something when you open a business when driving a car or even when eating a bony fish.
How much risk are you willing to take to achieve your investment goal? Your attitude towards a risk could be influenced by many factors both emotional or based on others’ experiences. So how do you evaluate your risk appetite? It is certainly not as easy as the desire for food, but it surely profiles your capacity to take it.
Here are the 4 main factors that will help you determine your risk appetite?
- Age and timeline
A younger investor may take a higher risk for a retirement or education investment plan though the period of investment would be longer, they are not in need of the funds soon. However, an older investor who wants a retirement plan will want a shorter plan since they are getting closer to their retirement period. They don’t have time to recover lost money during market inconsistency. It is however important to have an emergency account even for the younger investor to avoid pulling out of the investment.
- Investment objective/goal.
Why are you investing? What is the investment for? Is it for savings, retirement, or an education? An investment plan is designed to meet your objective and your objectives will determine how badly you’ll go for it.
- What’s your Comfort level
How comfortable are you taking the risk? When the market is irregular how will you react? Will you pull out of the investment if there are losses in a short period of time? If yes, it’s reasonable to choose low-risk investment options.
If loss of funds in investment will affect your living standards, then low-risk investments are more suitable for you.
- How much money do you have for investing?
With the objective of the investment in mind, if the funds to invest are in excess then you can invest in riskier options. Having money in surplus allows you to diversify your investments in areas such as equities and the stock market. Investing more money in high-risk options has potential for growth. However, it may also lead to loss of funds.
Taking on a high risk may lead to high returns or loss of funds. Low risk is safe. However, you may never realize your investment goal because the returns are low. Reviewing your investment is important as your risk appetite may change with experience in the market.
Sources: YoungMogul, investorschronicle, bt, angelone