What should determine your appetite for risk?

Risk is an integral part of life; we all take certain levels of risk at every stage of our lives, whether we are aware of it or not are another thing. It is very important for us to be aware of the risk we take, the result and consequences of it. Being aware of everything about the risk we take, tends to shield us largely of every psychological, emotional, and physical stress that might come from such risk.

Investment can be very risky; you would have to deal with different level of risk when investing. So you should understand your appetite for risk, and other things that should determine your appetite for risk. Before going into any form of investment, first you need to determine what would happen if you lose some or all of your investments, what would be the worst case scenario. How long can you live without needing the money you have invested and the returns. Results are not certain in investments, the value of your investment may go down, as well as the returns, and you may not get the original amount invested. So what should you do?

Determine your goal for the investment. When investing, as much as everything in life, there should be goal setting. These goals help you to focus on the end and how best we can get there. The time frame for which you want to invest the money and the possible return you would want to make on the money. The goal should also determine if it would be a short term investment or a long term one. Short term investment is usually under three to five years. Your short term investment could be for things like car purchase, school tuition, house payment etc. Appetite for risk in short term investments should be low. Usually the need for the money investment is very important, that you cannot afford to lose the money invested or the return, and because it is short term, if there be any drop in the investment, there possibly might be no time for the investment to recover from such a fall. But whilst taking a lower risk with your short term investments, the returns should be higher than that of savings, and should also be higher than the inflation (the invisible thief) rate. Hence, this guarantees a successful short term investment. Here you want to do mutual funds for investment in different money markets.

For the long term investment, which is usually for a period of up to 10 year and more, then the risk should be higher, such that whenever the investment drops in value, the investment the investment would still have enough time to recover from the down period, and make more returns. The rate should also be well higher than the inflation rate over the same period. Investment here could come in equity investment, real estate and so on.

Your personal situation or stage of life should also determine your appetite for risk. The risk a young person with not much responsibility and financial commitments can afford to have a high appetite for risk when investing. But once you become a father with those who depend on him financially, like education for his children, shelter for his family, feeding etc, he shouldn’t risk too much because of those responsibilities. Then, for those who are close to pension, it would be best to take out most of your investment from higher risk investment into a more steady lower risk. So basically, the stage that affords a much higher risk appetite is when you are very young with not much responsibility, so it affords you money to spare, invest, diversify investment, and consolidate investment because later days would demand it.

Risks

Your attitude towards risk also determines your appetite. Some persons are voracious with investment, always looking for avenue to turn in their money and get returns as soon as possible, then maybe opt out. Many-a-time, their attitude is that they would spread their investment across various types, basically to guarantee some security that they can’t lose all their investment, no matter what happens in different markets.

Personally, I don’t believe you can lose 100% of the investment you make, because even if you lose all your money, the knowledge you gain from the process of investing the money is usually priceless, and if you are resilient enough, you would make more than you ever lost in the process. Lastly, always seek the opinions of experts in money matters and investments, if you feel you are in-experience, before investing.

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