All investments come with some level of risk. When you entrust your money to the market, you risk losing all of it or only very small gains if your funds are directed toward conservative risks with low growth over time. Assessing how much risk you can afford to take is an important part of investing, but how do you go about doing so?
When you are younger, you may be able to take on more risk because you have more time left before retirement to regain any hits your investments may suffer over time. As CNN Money notes, different investment mixes are riskier than others, and your tolerance for risk decreases as you age. Those approaching retirement need to secure their financial standing, and should do so by moving investments into lower risk portfolios.
Risk can also be determined by your experience investing in the markets. If you have never invested before or made decisions on how to allocate your funds, then as a beginner you might make investing decisions that open you up to greater risk because you are not familiar with how certain situations are likely to play out. Similarly, you may feel uncomfortable taking a risk as a beginner because of this lack of experience.
A seasoned investor, on the other hand, is likely to expose their portfolio to a little more risk if they have already made high-risk moves in the past that paid off with profitable returns. Banking on that knowledge, such an investor is more willing to take that risk again in the future compared to a beginner.
The amount of income you earn and the depth of your current financial savings may also play a role in helping to understand how much risk you can afford to take. For example, if you are living paycheck to paycheck and have a very modest savings, you are not likely to risk losing that modest nest egg by taking a gamble on an investment. You will look for safer, more conservative investment options. This would be the best option given your income level at that point.
With a greater annual income and deeper pockets, you may be more interested in taking a risk. You may be able to tolerate losing a higher volume of money, and enjoy the fallback of still earning a higher income to replenish some of your losses. Investopedia points out that although this is a negative aspect of investing, you need to consider how much money you are truly willing to lose before deciding.
If you are looking further down the road at long-term goals, your willingness to take on risk might decrease because you have a long time to get there and may have a higher figure in mind. Short-term goals, on the other hand, may increase your willingness for risk in many cases because the figure you are targeting could be lower and the amount you are investing lower as well.
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