How Much Risk Can You Afford?
All investments come with some level of risk. When you entrust your money to the market, you risk losing all of it or accumulating very small gains if your funds are directed toward ultra-conservative risks with low, but anticipated, growth over time. Assessing how much risk you can afford to take is an important part of investing, but how do you go about doing so?
Consider Your Age
When you are younger, you can afford to take on more risk because you have more time left before retirement to regain any losses your accounts suffer with market fluctuations over time. Risk appetite should decrease with age. Those approaching retirement need to secure their financial standing, and should do so by shifting funds into less-volatile portfolios.
Are You Experienced?
Risk can also be determined by your experience investing in the markets. If you have never invested before or made decisions on how to allocate your funds, then as a beginner you might make investing decisions that open you up to greater risk because you are not familiar with how certain situations are likely to play out. Similarly, you may feel uncomfortable taking a risk as a beginner because of this lack of experience.
A seasoned investor, on the other hand, is likely to expose their portfolio to a little more risk if they have already made high-risk moves in the past that paid off with profitable returns. Banking on that knowledge, such an investor is more willing to take that risk again in the future compared to a beginner.
The amount of income you earn and the depth of your current financial savings (cash on hand) also plays a role in determining how much risk you can afford to take. For example, if you are living paycheck to paycheck and have a very modest savings, you are not likely to risk losing that modest nest egg by taking a gamble on an investment. You will look for relatively safer, more conservative investment options.
Conversely, an individual with a greater monthly income and deeper pockets is apt to be more interested in taking a risk. As this individual can tolerate losing a higher volume of money, and enjoys the fallback of still earning a higher income to replenish some of those losses, they are more likely to invest more money into higher-risk investments . Investopedia points out that although this is a negative aspect of investing, you need to consider how much money you are truly willing to lose before making a decision.
Finally, you can determine what level of risk you can afford by assessing your financial goals. If you are looking further down the road at long-term goals, your appetite for risk might decrease because you have a long time to get there and may have a higher figure in mind. Short-term goals, on the other hand, increase the appetite for risk in many cases because the figure you are targeting could be lower and the amount you are investing lower as well.
In the end, any investing decisions require that you first assess your appetite for risk. Contact CalBay Investments to help you in assessing your true level of risk.