Step 1: Assess your risk tolerance
Conservative? Balanced? Aggressive? Which approach suits you?
Deciding to start investing is the crucial first step on every investor’s five-step investment journey. Of the five steps, the first is to assess your risk tolerance and decide what mix of assets you need.
Different people have different attitudes about investing. You may not be willing to take any risks or withstand losses, and would rather forgo potentially higher returns. You may be willing to take some risks but want to avoid serious volatility. Or you could be willing to take risks in exchange for returns that outperform the markets.
Gauging your risk tolerance
How do you gauge your risk tolerance? Look at your investment horizon. Put simply, the more time you have to invest, the more risks you can take because you have the time to ride out the markets’ ups and downs. That’s why, for example a 30-year-old who plans to retire at 65 can typically invest more aggressively than a 70-year-old retiree.
Imagine this 70-year-old retiree relies on their investments for income. They need their portfolio to be conservative and focused on preserving capital even in the face of market volatility. Of course, this doesn’t necessarily mean the 70-year-old retiree should completely avoid more aggressive investments. The risk of outliving your money can be tempered by maintaining some more aggressive growth-oriented investments in your portfolio.
Setting your goals
Your risk tolerance is also directly linked to your life goals. Ask yourself if you need to set aside funds for your children’s education. Are you going to buy a property in the near future? These factors will have an impact on your cash flow. And what about unexpected expenses? You may need to reserve some cash at all times just for emergencies.