Investing: Risk and tolerance

Your risk capacity measures how much risk you can afford to take based on your financial circumstances. You’ll want to review your current financial position by asking yourself questions such as: Do I have a steady income? Do I anticipate my expenses increasing? If I have debts, are they manageable? Do I have an emergency fund? Do I have dependents? How much disposable income do I actually have for investing?

Reviewing your current financial position will help you to understand your risk tolerance, and how comfortable you are with the possibility of losing money in exchange for potential high returns. Imagine you invest £1,000 and after six months, its value drops to £800. Would you panic and sell? Hold on and wait for recovery or invest more because you believe it’s a good time to buy? If the idea of losing money makes you anxious, you might have low risk tolerance. If you’re okay with short-term ups and downs for potential long-term gains, your tolerance is higher. Being financially stable with a solid emergency fund and no outstanding debts might make you feel more comfortable and able to afford to take more risk.

Investing can feel scary, especially if all you’re thinking about is the money you could lose. But here’s the thing, it feels much less scary once you know two things: your risk tolerance and your goal. Having a goal is really important. A clear goal helps you stay calm. It helps you stick with your plan even when the value of your investment goes up and down. So let’s pause and think about your own situation. What are you investing for? A first home? Retirement? Your child’s future? When will you need this money? If you needed it back next year, would you be comfortable if it went down for a while? Or would that feel too risky? And how does your stage of life affect all this? Maybe you’re just starting work. Maybe you’re raising a family. Maybe you’re close to retirement. Each stage changes how long you can leave your money invested.

Now think about how you feel about risk. If your investment dropped in value for a few months, would you take the money out or could you wait for it to grow again? And finally, what matters most to you right now? Is it keeping your money safe? Or is it growing it over time? Even if that means more ups and downs? Working through questions like these will help you find an approach that fits you. And when you know that, investing doesn’t quite feel so scary anymore.

Everyone’s investment journey is different. Understanding your risk tolerance and capacity helps you make investment choices that fit both your money and your mindset. By knowing your goals, your time frame, and how much risk you’re comfortable with, you’ll be better prepared to ride out the ups and downs and stay on track for the future.

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