Investments inherent both risk and return with a direct relationship. As there is no “one size fits all” approach in risk management, so it’s wise to find out before you take your steps!
The basis of the investment is that the higher the risk the higher the possible return. The lower risky investment tends to offer lower returns. Therefore, those who attracts to high returns, need to be sure that they can cope with the volatility that can accompany those types of investments. While, for stability, should prepare to compromise on the return.
If you’re an or potential investor, make sure you understand your risk tolerance before crafting the investment strategy.
What is Risk Tolerance?
It is the degree of variability you’re willing to withstand with your investments. Risk tolerance certainly varies from person to person and over time frame too. For example, for a short- term investment, you may not be willing to put up with peaks and crashes. While someone with a longer period might be willing to take that risk to gain a potentially higher payout.
What shapes people’s Risk Tolerance?
It mostly driven by the hard numbers and by psychology. Hard numbers involve comparing the investment goal to the data available on the potential investment options. Then putting that in the context of other factors, like economic risk.
On the other hand, the psychology factor is mainly driven by behavioural psychology. Risk-taking behaviour can be influenced by emotional factors; how the person is feeling at the time, or how they think they will feel if their decision pans out as expected. The risk-taking decisions can also be shaped by the past experiences. Your approach to some types of risk might be formed in early ages like when you were in primary school or by seeing your parents and siblings. However, that doesn’t mean you can’t understand more about where you’re coming from, and in doing so, get closer to your goals.
Balancing your Risk Tolerance and Goals
The problems arise when the risk tolerance is low but the goals are particularly ambitious. However, when the risk tolerance is high, some may be tempted to break medium to long-term plans even though they are just right on the track to achieve their goals. In simple words, balancing your risk tolerance and goals takes a consistent effort
What is your Risk Tolerance?
To check your risk tolerance, think about how you’d be likely to react to a significant fall in the value of your investments.
Usually, conservative investors are likely to sell and run, believing that this will mitigate their losses. While aggressive investors might use the drop to increase their holdings. Most of the people are in between these two points.
If you’re not sure, I can help and assist you to make your investment choices based on your risk profile, situation and investment goals.
Remember, what keeps you awake at night might be well within someone else’s comfort level.
Note: *The above information provided is general in nature. It is not to be relied upon as personal financial advice. As it has not considered your personal circumstances, needs or objectives.