Risk Tolerance in Modern-Day Investing
Updated: Apr 3, 2020
The following is an article “Risk Tolerance in Modern-Day Investing” by Marc Primo.
Most decisions in life entail risk and as you grow older, more and more thought should be given to the things that really matter. One of these things is money; and when it comes to determining where to invest your hard-earned dollars these days, no other word should be given more importance than ‘risk’.
Whether you are fresh out of college and learning to save up for rainy days, or planning your retirement at the ripe age of 60, it’s best to know how much risk you can take when investing in something for the present or future.
This is when psychology melds with your financial literacy and you’ll be surprised that the territory these two cover can be quite enormous. Risk is different for everyone and largely depends on their type of lifestyle, age, and personality. For example, 30-somethings have more leverage to take risks than those who are planning retirement. But when is it really okay to take risks in investments?
Being financially literate while you’re young gives you an upper hand in handling risks. Unfortunately, it’s also the most opportune time for debt to crawl in. Being aware of your purchasing power, leverage for loans, and prospects for higher income will definitely make it easier for you to study consequences when making investments.
The usual trade-off is that the higher the risk, the higher the return. Reviewing your options carefully with an able financial advisor or firm can really pay off in the long run. They can evaluate your risk tolerance as your investments fluctuate and determine how you would handle downsides as opposed to when profits come in. Financial experts can calculate risks based on your age, investment knowledge, financial standing, and lifestyle, which can be translated as your asset portfolio. Modern “portfolio theory” is an approach that establishes your risk levels side-by-side with your asset classes via a questionnaire.
The economy is a live beast that constantly changes over time and calculating your risk tolerance entails well-calculated projections through years of inflation. This means that you will have to review your portfolio vis-à-vis your assets and equities.
Another good preparation for risk tolerance is dollar cost averaging, wherein an investor can buy the same amount of an investment via regular intervals regardless of the asset price. This strategy lowers the effects of price falls by spreading your investment out over time. On the other hand, value averaging or investing more as share prices drop is also a good idea as it bases your investments on the total size of the portfolio each investment period.
As long as the risks are calculated, there’s no need to worry when your investment turns futile. These days, you can foresee lower interest rates in investments, so it’s vital that you do your research on the most efficient strategies in finding the right investment vehicles. Consider factor-based investing or actively managed exchange-traded funds that can strengthen your asset portfolio despite investment volatility, and you can at least be certain that your investments remain sound as you go along.