When thinking of investing, people generally want to obtain high returns without thought to the risk level involved in achieving this. Therefore, working out your own risk appetite is one of the first objectives any future investor should do.  When thinking about investment risk, you need to consider financial factors such as – inflation, volatility, interest rates, time horizon and investment allocation. As a result, you need to know what your own threshold is before you make investment decisions.   

It’s important at this stage to distinguish the difference between risk appetite and risk tolerance. The idea of risk appetite is to establish what amount of risk is acceptable, whilst risk tolerance defines the ability to accept the risk. Therefore, these need to be determined before you invest in order to help dictate the distribution of your capital and assets.   

Investing on a Regular Basis  

With regards to a regular savings vehicle or pension whereby you invest on a regular basis. As a result, you can discover your tolerance by knowing your income and your expenses. This will tell you how much you can afford to contribute to investments. Creating a cash flow budget is an integral component of investing effectively. Identifying how much you spend in a week, month or year will allow you to see how much you can afford to invest on a regular basis. Maintaining a liquid cash reserve that can support your current lifestyle for the next 6 months is essential. In addition, your financial responsibilities will also play a role in assessing your risk tolerance. 

Risk appetite measures the degree of fluctuating value of an investment that an investor will be able to withstand. If you cannot handle large fluctuations in the price of an asset, you might act on impulses. In turn, this affects your judgement as you may see things negatively and wish to stop your losses or take minimal returns.  

Continuing the journey of investing, one must consider their goal for the investment. Namely, what is the reason you are investing? Is the investment towards saving to pay for your children’s education planning, retirement, or simply wealth creation?   

Considering your Investment Goal  

You need to consider your investment goal as it will have a direct impact on the investments consider for your portfolio. For instance, if you are investing in a pension scheme or a savings plan for your retirement, you may consider taking a more cautious approach. You will begin to invest in assets that are less volatile which will likely see less severe fluctuations. Hence, considering the investment time frame is as important. Your risk appetite will undoubtedly change over time. As we get older, we begin to focus more on financial security and so a lower risk profile would be more suitable.   

Classifying Risk Appetite  

There are three basic classifications for risk appetite – Conservative, Moderate and Aggressive. So, if you wish to invest “Aggressively,” you could achieve high investment returns. However, this is coupled with a high degree of risk. Many casual investors are not as inclined to this level of risk with their own finances. Generally, high-risk investors may invest all their capital into equities and other high-risk assets.   

A “Moderate risk” investor means you are taking more of a balanced approach, such as accepting some risk that will hopefully provide steady growth over a period of 10 to 15 years. A “Conservative Risk” investment strategy is more risk-averse, meaning that you will get little volatility on your investments and receive a lesser return.   

If you are thinking about investing, there are many factors (including the above) that you should consider. Speaking to a qualified professional can help you to optimise your financial goals and maximise the opportunities that are available to you. 

Contributor: Mobine Khaliq

Contact Us