Adrenaline seeker or conservative keeper? Let’s talk about risk tolerance in investing.
Risk plays a big role in pretty much all the decisions we make, everything from deciding what to wear to work, (Oodie or blazer), to deciding if it’s okay to have that fourth shot even though you have to be up at 6am tomorrow.
And risk plays a big role in investing too.
Safe vs risky investments:
All investments involve a level of risk; some more than others.
Some examples of safer investments include bonds, savings accounts or fixed deposits.
These investments almost guarantee a return but there’s still a tiny amount of risk involved with them (*cough cough* Silicon Valley Bank) - although the returns are often modest.
Meanwhile other investments like individual stocks, options, or crypto are much riskier, but offer juicier returns.
In other words, there is a spectrum of risk for all investments.
So before you start investing, you need to determine what your risk tolerance is (aka how much risk you’re willing to take on in your investments).
Factors impacting risk tolerance:
Your risk tolerance should be considered impacted by a bunch of different factors including:
So let’s look at three different risk profiles; risk-averse, risk-moderate, and risk-aggressive.
First up: risk averse.
If you’re risk averse, you’re very cautious with your money and don’t want to take the chance that you’ll lose it.
Think Amy Santiago from Brooklyn99 - following rules to a tee and playing it safe.
You’d rather have a guaranteed return on your money, even if it’s not the highest possible return.
As a low risk investor, you’re more likely to stick with low-risk investments like bonds or mutual funds that prioritise stability over high returns.
Moderate investors are willing to take on a bit more risk than conservative investors but they still want to be careful with their money.
You might be willing to invest some money in ETFs or other higher-risk investments for example, but you’re probably wanting to invest most of your money in low-risk investments.
Risk-aggressive investors are all about chasing high returns. They’re the adrenaline seekers who enjoy putting themselves on the edge.
Risk-aggressive investors are willing to risk losing a bit of money to get potential higher rewards.
They tend to be pretty market-savvy too and have developed strategies to take risks from their experience in investing.
It’s important to note that each risk tolerance is suitable for different people on their factors, like age, goals and income.
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