It is often hard to achieve the rewards of investment without taking on a little risk. However, how much of your wealth you are willing to risk will often differ at different stages of your life.
When it comes to risk, everyone is different. For some a calculated risk with the chance of higher return is worthwhile, but other risk-averse individuals might be unwilling to put their capital on the line.
More often than not this will come down to each saver’s own set of circumstances, including the wealth they already hold, their previous experiences and their innate psychology.
How much risk to take
A good way to begin to think about risk is to calculate your tolerance to it. Spend some time thinking about how much money you could lose without your lifestyle becoming affected.
It is best to do this by considering certain scenarios, where your investment could drop in value by 10, 20 or 50 per cent. It is generally better to plan for the worst, rather than hope for the best.
If at any point you feel that your life would be substantially affected due to the losses you could incur, then you have reached your answer in most cases – even if the potential return could be significant.
Risk over time
Risk is often linked to the time it will take to reach your goals. If, for example, you are saving for later life, but you are only in your 30s it may be worthwhile taking a riskier approach.
This is because over a longer period you will be able to withstand more short-term losses or volatility, as long as the overall return on investment is greater at the end. This approach allows for savings to fall, recover and rise repeatedly.
However, if you anticipate needing to access your savings and investments sooner you might reduce your risk profile so that you maintain a reliable source of accessible income.
If you are at all unsure of how much risk to take, a general rule is to never invest more than you can afford to lose.
However, if you would like a more nuanced approach, it is far better to speak with and seek the advice of an independent financial adviser, who can help you to gauge your risk profile and develop a plan that aligns this with your goals.
