How Much Risk Can You Tolerate? Part 1 of 3
Will Rogers, the American humorist, when talking about the investment schemes in North America at the time, said “I am less concerned with the return on my money, than I am with the return of my money”. Will was aware of the truth that the higher the potential rates of return on an investment, the greater chance of loss.
The dictionary defines risk as the exposure of someone or something valued to danger, harm or loss. If that something of value is your financial security the question is “How much risk can you tolerate?” The answer to this question for each of us depends on a number of different factors. A few of these are:
• Your Age: Generally, the older you are the more risk averse you tend to be. When one has less time to make up any losses, people tend to shy away from undue risk in an attempt to preserve capital. Conversely, younger investors tend to be more aggressive comfortable in the knowledge that time is on their side.
• Wealth: If you have significant wealth, you can apportion some of your investment portfolio into riskier ventures that can return above average returns. It has been shown, however, that those with substantial wealth tend to be more conservative in their investment approach. For these individuals it is often about preserving the family fortune for successive generations.
• Lifestyle: If your lifestyle demands a significant portion of your income you may be reluctant to be overly aggressive in your investment approach. Here, a loss could affect current consumption by requiring your investment funds earmarked for retirement or security to be replenished.
• Asset Allocation: If you practice asset allocation, some of your portfolio may be apportioned into higher risk investments. It is important to remember that you do not overweight these investments compared with other which may be more stable. By keeping the proper allocation ratios, if you do incur a loss, it will not overly damage your financial plan. The bonus here is that in a good market it will enhance your overall rate of return.
Next month we will explore other risks that could impact your financial security.