The first stage in investing in any market should be determining your risk appetite. You might be able to navigate the market’s high peaks and low valleys with ease. Alternatively, you may find the uncertainty associated with an aggressive investment approach to be too stressful.
Your risk appetite is determined by three factors: your risk tolerance, the amount of risk you need to take to meet your financial objectives, and your loss capacity (how much you can afford to lose). You may not reach your financial goals if you take on too little investment risk, and you may lose the money you can’t afford to lose if you take on too much risk.
These three questions can help you figure out how much investment risk you’re willing to take:
How much Investment risk can you take?
According to Mark Gartman, Financial Advisor at Regions Investment Solutions, if you want to achieve a particular level of financial success, you must have certain financial and emotional risk tolerance. Financial development necessitates a willingness to take risks, both financially and emotionally. You may act rashly if you find it too stressful to watch the value of your portfolio fluctuate. If market changes make you nervous, you might want to consider developing a portfolio with lower investment risk.
What is your investment goal?
According to financial advisor David Gartman, a sound financial strategy considers the big picture. It’s best to think about your goals, worries, and assets. Also, ask yourself, “What am I attempting to achieve?”
Maintaining a diverse portfolio to work toward financial goals while minimizing risk is recommended. The goal is to achieve balance so that no single asset falls into a single category.
What is your investment timeframe?
Your risk appetite can fluctuate as your investment timeline progresses, which takes into account both your age and the amount of time you have to attain your financial goal. You may be able to bear a larger amount of financial risk when planning for retirement. When you’re in your 20s, set aside at least 10% of your net income per paycheck for long-term goals like retirement. According to Gartman, as you get closer to retirement, your risk tolerance will likely fall because you will have less time to recuperate any money lost due to market changes.