We all know that investing comes with a certain level of risk. But what level of risk are you comfortable with? That can be a difficult question to answer since it usually involves a number of complex assessments and honest answers.
Generally speaking your risk appetite is often determined by three main factors:
- Your investment goals and timeframe
- How you assess and view risk personally
- How much you can afford to lose
1. Your investment goals and timeframe
It’s important for you and your financial adviser to understand what your expectations and timeframes are when it comes to assessing your risk appetite.
Are you after a long-term increase that outperforms inflation saving account rates or are you after aggressive short-term results? How accessible does your money need to be during that time? All of these factors have a strong impact on what options are appropriate.
Age is something most of us don’t like to talk about, but it has a definite impact when assessing your risk appetite. Younger people usually have more time to ride out the highs and lows of markets and are therefore more likely to take on higher risks, while those closer to your retirement age may feel the need to be more conservative in their approach.
2. How do you view and assess risk personally?
This is probably one of the hardest questions to answer honestly, since your personal relationship with risk and money is often personal and deep-seated. Studies have shown that your relationship with money is usually formed at a very young age or based on past experiences.
Naturally, no-one likes to lose money and the objective of investing is always to gain more not less. But are you able to cope not just rationally but also emotionally with a downturn or losing some or even all of your investment?
While investing can and should be financially rewarding it can also be emotionally draining at times, so it’s important to be honest and assess realistically how much risk you can and are willing to handle personally.
3. How much are you able to lose?
We’ve touched on the fact that you could lose money when investing. So, before you jump on the next opportunity it’s important to assess how much you are willing to lose. Some questions that can help are: Who is dependent on your income? Is your investment disposable income or all you’ve ever saved?
In this article we’ve covered a number of key factors that should be carefully taken into consideration when assessing your risk appetite. We hope understanding those factors can better help determine your risk appetite or tolerance for risk.
