Investing Based on Your Risk Profile: A Smarter Way to Invest

Most financially literate people understand the importance of investing. However, some may find just the mere thought of investing a daunting task. While there are others who are first met with excitement as they try out their first investment. A few will think that they know enough about investment, only to find out that their skills and plan doesn’t go their way.

For the most part, amateur investors often find themselves like a deer in the headlights, as they are caught by surprise at the first investment mistake that breaks their chance for a bigger return.

Although some of these mistakes are due to a faulty decision, most are a result of failure to follow through with their investment game plan. So, why do most investors fail to follow through with their investment plans anyway? Let’s delve deeper into this question and see how we can address this issue.

Matching Your Investment Risk Profile with Your Investment Game Plan

One of the main reasons why investors lose money in investments is due to their faulty business plan or simply failing to follow through with it. What does it mean? Oftentimes, when we think of investing, we think of seeing our money grow exponentially in an instant. Because of this, a lot of people mistakenly think that investing is as simple as putting your money in an investment vehicle and watching it grow right away. However, this is often not the case.

Investments grow over a period of time. As such, it’s inevitable for most investment assets to take a dip from time to time. Furthermore, neophyte investors often make the mistake of shutting down their investments at the first sign of a dip in value due to fear. That’s highly because they don’t have a concrete plan as to how long they’re expecting to hold on to their investments before realizing their gains.

As a result, these mistakes are often closely related to the mismatch between your risk profile and your investment game plan. So, it’s very important to assess your own risk profile before crafting an investment game plan. It’s a lot simpler and easier to follow through to achieve your investment goals.

Factors to Consider When Assessing Your Risk Profile

There are several factors that you should consider when assessing your risk profile. In this section, we will be discussing these various factors and how they affect how you should invest.

Investment Objectives

The first question that should come to mind when making an investment is, “What is my objective for this investment?” For example, you may be investing for your retirement or you might be saving up for your child’s college education. Other times, the reason for investment is to grow your money so that you can invest on other things like a boat for fishing.

These objectives will result in different attitudes and expectations when it comes to investing. Investing for retirement may mean that you’re more interested in preserving the value of your capital. Investing to buy a boat may mean that you will want to see your investment grow exponentially right away. On the other hand, investing for your child’s education may require an approach that retains the value of your investment while trying to grow your funds.

Investment Horizon

In relation to the first factor discussed above, another factor that will greatly influence your investment risk profile will be your investment time horizon. It refers to the length of time in which you are expecting to hold on to your investment.

Using the example above, let’s say you’re investing for your retirement at the age of 30, and are planning to retire at the age of 60. That will mean that you have around 30 more years to invest. It also means that you can weather most of the fluctuations and dips that your investment funds might experience. However, it will change in your mid-50s. That will mean lesser time and lesser tolerance for a loss. In this case, it’s best that you prioritize capital preservation rather than capital appreciation.

Financial Liquidity

Financial Liquidity pertains to the amount of cash that you have that you won’t use right away. Some might be able to spare just 10% of their money for investments. Others may have more leeway and can hold 50% of their capital in a long-term investment. Moreover, the more capital you have available that you don’t expect to use right away, the longer your investment horizon tends to be.

Investment Experience & Knowledge

Another important factor that you should consider when investing is your knowledge and experience about investment schemes. New investors who haven’t tried investing in any asset often have lower risk tolerances. On the other hand, seasoned investors who have invested in the stock market will often be more tolerant of market fluctuations and can often stomach a minor or even a bigger loss.

Risk Tolerance

Finally, your risk tolerance is an important factor to consider when investing. It refers to what you think you can handle in regards to the fluctuation of your investment capital. Will you be able to accept a high degree of risk for the opportunity to gain huge returns? Or, will you prefer a steady minimum return with minimal risk?

Planning Your Investment Based on Your Risk Profile

Given the risk profile considerations that we have discussed above, it’s important to match your risk profile with how you invest and what you can expect from your investments. Thus, helping you manage your expectations on how your investments grow can minimize unbearable risks, and help you follow through with your investment game plan.