Know your risk appetite
Before you start investing it’s important to work out what your “risk appetite” is. Essentially, your risk appetite is how comfortable you are with the risks associated with investment returns.
For example, someone with a high risk tolerance is willing to accept losing their capital in search for higher investment returns. On the other hand, someone with a low tolerance, also called risk-adverse, is often more concerned with preserving their capital.
At Etlanda, we use a range of tools to determine what’s right for our clients. Everyone is different and what’s right for you will depend on:
- Your personal circumstances including your capacity to accept risk
- Your investment goals, time frames and need for returns
- Your personal attitude towards risk.
You can determine your own risk tolerance
Ask yourself these questions:
1. What can I afford to lose?
What would happen if you lost some or all of the money you invest? Think about what impact losing this money would have on you, your business and the people who depend on you financially.
2. What are my goals and timeframes?
Work out what you want to achieve in the short, medium and long-term. If you have short-term goals it might make sense to save for these using cash or a term deposit because your money needs to be accessible. If you have long-term goals it might make sense to put these into shares because you have more time and can afford to.
3. What’s my attitude towards risk?
This is all about how comfortable you are with your decisions. If you’re the kind of person who will lie awake at night worrying the chances are an aggressive investment strategy isn’t for you. On the other hand, if you’re comfortable with knowing your investments might go down (and you can afford it), an aggressive strategy might be just the thing you need.