Risk management aims to help you boost your risk-reward for a certain risk tolerance. But it does not remove risk entirely.
Here are four factors you must first consider when measuring the amount of risk you can actually tolerate.
Amount of investment experience
Your amount of experience in investing should always be considered when you try to determine how much risk you can actually tolerate. Are you new to investing? Have you been in the investing world for some time? It is important that you start on new ventures with a certain degree of caution.
Do not simply jump in because it seemed like everyone is doing the same, this philosophy applies to investing too. It might be a cliché, but you should still remember it.
Aim for more experience before you decide to commit bigger amount of capital. Strive to preserve more of your capital.
The actual investment you’re considering
There are different levels of risk on different types of investments.
Two things every investment has in common are that risk is always involved in varying degrees and that returns are not always guaranteed. Therefore, choosing the type of investment you decide to commit to should always be considered very carefully in order to make sure that it suits your circumstances.
Your risk capital
Risk capital is the money available at your disposal without affecting your way of life if you end up in a situation wherein you lose.
This is defined as liquid capital, or capital that can easily be converted to cash. It’s important to consider your available risk capital as well as your current net worth when you determine your investment risk tolerance.
Investment time frame
There is a cliché commonly known as the “age-based risk tolerance” which shows that a younger investor has a long-term time horizon and can therefore take more risk while an elederly individual on the other hand will have low investment risk tolerance.
Generally, such a thought process might be true, but not every time. So do not give too much focus on your age when assessing your risk tolerance. Don’t get me wrong, it is still important to consider your age and the time frame you have for investing, but it’s not the only factor.
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