What is your risk tolerance - and why?
Written on the 5 May 2018 by Arrow
Risk is inherent in investing and there is no one size fits all approach to managing and dealing with risk. What keeps you awake at night might be well within someone else's comfort level.
The central principal of investing is the higher the risk of a particular investment, the higher the possible return. Of course the flip side of that is that low risk investments typically offer low returns. Those that are attracted to high returns need to be sure that they can cope with the volatility that can accompany those types of investments and those who want stability need to ensure that they are prepared to compromise on return for investment.
It's worth developing an understanding of how you feel about risk as your risk tolerance should dictate your investment strategy.
What is risk tolerance?
What shapes people's risk tolerance?
The psychology of risk tolerance draws from many different areas of behavioural psychology. Risk taking behaviour can be influenced by emotional factors; how the person is feeling at the time, or how they think they'll feel if their decision pans out as expected. Your decisions can also be shaped by your past experiences.
It's possible that your approach to some types of risk might be formed by an early age when you're in primary school.i By that age, you've already absorbed a lot from your parents and siblings. But 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
What is your risk tolerance?
Conservative investors are likely to want to sell and run, believing that this will mitigate their losses. Aggressive investors on the other hand might use the drop to increase their holdings. Most people are somewhere in between these two poles.
We can help you to work out your risk tolerance, and assist you to make investment choices based on your profile, situation and investment goals.