Understanding Your Risk Tolerance

January 19, 2021

Some people like taking a slow drive while others prefer to zip by on a high powered machine. Whatever you prefer is based on your personality and needs.

Similarly, your investments should match your personality and needs. In investing, your risk tolerance helps determine whether you’d be better off with steady-moving investments or investments that give you a more intense ride.

How to figure out your risk tolerance

Time horizon

This refers to how long you plan to hold your investments. If you need your money soon then you probably want to hold it in more stable investments because your portfolio might not have time to recover if the market stumbles.

Goals

What is the specific reason you are investing? Is it to buy a house or put away money for your children’s education? If you need more growth to reach your investing goals, you might need to take on more risk.

Your risk appetite

How much risk can you tolerate? If the thought of sky diving gives you palpitations, then you may be risk averse. The more risk averse you are, the safer your investment should be. You only want to own investments that you could live with even when the market hits some turbulence.

Different investments have different risks

The way to think about the risk of investments is based on their volatility. More risky and volatile investments tend to reach higher highs and have lower lows, while less risky investments don’t experience such severe extremes. .

Cash

Cash is considered one of the least risky investments. Because of this, it might not return enough to always get you where you need to go, and it can lose value to inflation over time.

Stocks

Alternative Assets

Alternatives like REITs and commodities are generally riskier than other investments. That being said, they offer a good diversification opportunity for any investment portfolio.

Bonds

Bonds are generally less risky than stocks. That being said, bonds are definitely not immune to suffering losses. This depends on the credit worthiness of the bond issuer.

Your portfolio should have the right amount of risk for you

Once you understand how much risk to take on, you can put together a diversified portfolio that consists of each investment. For many investors, it makes sense to hold a mix of stocks and bonds, but this mix would vary depending on whether they are looking for something conservative or aggressive.

Conservative portfolios would consist of a larger allocation to bonds and cash while aggressive portfolios would consist of a larger allocation to stocks.

Crea8’s Advice

Don’t invest without first understanding your risk tolerance. Once you do this, choose a selection of investments that would match your risk tolerance.

Crea8 makes it easy and seamless to do this with our Goal based investing service. We help you determine your risk tolerance and then tailor an investment portfolio for you based on this.

Tips for your journey

If you are new to investing and are not sure how to start, check out our article titled ‘8 steps to successful investing’ for a few pointers.

If you want to learn more

For further insight into our investment methodology including our Goal based investing methodology and how risks can be tamed and harnessed to create optimal risk-reward investments., check out our white papers.