Figuring Out Your Risk Tolerance Level for Investing

If you’re ready to start your investment journey, then you need to understand early on that risk and reward go hand in hand. You need to realise that any form of investment involves some degree of risk.

The only question is, how much risk are you willing to take? 

This is essentially called risk tolerance. It’s how much of a loss you’re prepared to have when you invest your money and grow your portfolio. This guide can help you determine your risk tolerance level so you can start investing your money comfortably.

How Do You Determine Your Risk Tolerance Level for your Investment Strategy?

There are several ways to find out what your risk tolerance level is. First, it’s important to understand what you’re investing for – What are your investment goals?

Once you have established what your goals are, you can figure out your risk capacity. Here are some questions you can ask yourself or determine with an expert financial adviser when determining your risk tolerance level.

1. How Much Money You Have to Invest

The first step is to figure out how much money you have to invest. If you have a large sum of money, say $300,000, you may want to invest that sum into a diversified portfolio, where you can diversify your finances into higher-risk assets and lower-risk assets.

For example, you could invest most of your money into stocks and some into bonds, so market volatility has less impact on your returns.

If you have a small sum of money you want to invest, say $5,000, you may want to go the opposite route. You may want to place most of that sum into a more conservative portfolio, so the investment risk is lower.

Your personal financial situation is included in the many factors that determine your risk tolerance and is one that you may want to seek advice upon. 

An expert investment adviser will consider your personal circumstances and financial goals when providing you with tailored advice so you can make informed decisions regarding your investments.

2. What is Your Investment Timeframe?

The second step is to determine how much time you have to invest. If you’re in your early 30s, you may want to determine a long-term strategy, where you are happy to take greater risks in your investment decisions as you have more time to reap high returns despite natural market fluctuations. 

If you’re a more mature investor, and may only have 5 years till you reach your retirement years, you may choose to be a more conservative investor. This may include adjusting your portfolio to only include asset classes that can provide you with stable returns, so you can ensure you have a stable income for your retirement no matter what happens with investment markets and the global economy.

3. What Career Stage Are You In?

Your career may also impact how much risk you’re willing to take as well as the stability of your income. If you are a young person who is still establishing your career, it may be a good idea to be conservative with your investments, as you may not be in the financial position just yet to take more risks. 

However, if you’re further along in your career, such as a senior executive or general manager, you may be able to afford to take more risk with your investments.

Additionally, if you have a secure job and secure income (and you have certainty of your future income too), you can usually afford to plan ahead and have confidence in your investment decisions.

4. What Are Your Investment Goals?

The reason for your investment is another factor in determining what risk you’re comfortable with.

If you’re going to need the money soon for a particular goal (like a house, holiday or starting a family), you’ll likely be more conservative with your investments. However, if you’re investing money you are not relying on and just simply growing your money for the future, you can generally afford to take more risks.

For most people, the more you have to lose, the more conservative you should be with your investment. If you have a lot of money to invest, you will usually be comfortable investing in high-risk asset classes. 

Seeking expert advice to get started on your investment portfolio, tailored to your investment risk?

Finding out what your risk tolerance level is essential because it determines how you’ll want to invest your money. 

Being aware of your risk tolerance level, and how it relates to what you’re investing for, can help you make decisions regarding your investments. This will help you invest in the right kind of assets so that you can reach your financial goals.

Poole Advisory is a privately-owned boutique advisory firm that can help you get your finances under control. With our suite of financial advice, we can make a tailored approach to your finances and help you make sound decisions to ensure your stability and financial security.

If you ever need investment advice and help with your retirement planning, Poole Advisory has you covered. 

Contact us today to book a complimentary appointment!