How do you evaluate your risk before you invest? Experts share how to go through Risk Profile Evaluation to ensure that your take calculated risks towards achieving your personal financial goal, and ways to reduce your investment risk.
Here are the six factors you should consider that will be affecting your risk profile. Let’s dive in!
Factor #1: Age
Risk tolerance reduces as you grow older because you have less time to recover your loss if you make any financial mistakes.
In other words, do your due diligence before investing in a company, a stock, a property or any investment vehicle.
The more you understand the ins and outs of an investment vehicle, the better you can make informed decisions and hence, reduce your overall risk.
Factor #2: Your Current Family Situation
If you are Single, young and capable, you can tolerate more risks in your decision-making. You have more time to learn, study and grow compared to someone who is already retiring.
If you’re a young and newly married couple, you should also be able to tolerate more risks towards achieving your financial goals.
However, couples contemplating divorce and couples with kids should be more risks adverse and opt for more careful planning.
Factor #3: Your Current Income Source
Double-income families with both husband and wife working can assume more risks.
For example, the one with the more stable income, with good employment medical and retirement benefits can enable the other spouse flexibility to take a little bit more risk for higher financial gains, or even starting a business.
Consider your level of commitment and what would be the worst that can happen, if the investment does not go as planned.
On the other hand, families with just one spouse as the sole breadwinner should not be making high-risk investments.
Factor #4: Availability Of Surplus Cash
If you have a comfortable surplus of cash buffer that could take you through for a minimum or more than 6 months, then you can take more risks with your investments.
If not, take very calculated risks. Always think about an exit plan and the worst-case scenario as no one can guarantee how the market will perform.
If you are burdened with debts, it is advisable not to take on any high-risk investment vehicle.
Factor #5: Your Coverage
Risks resulting from unforeseen life events such as accidents, sickness, disability or premature death should always be taken into account first before you utilise extra funds to pursue a higher return corresponding with a higher-risk investment.
If you have adequate insurance coverage to indemnify yourself or your family, then you might be spared the financial burden of having to utilise your liquid assets.
Factor #6: Sleepless Nights
Lots of investment schemes in the market paint remarkably beautiful prospects with the promise of high returns.
Do invest with care!
It is not worthwhile holding on to one investment if you will be concerned about parting with too much of your hard-earned money.
Would you be always thinking about how this investment could potentially compromise your existing lifestyle if it doesn’t go well?
Ask yourself, “If this investment goes bust, will I still be able to sleep at night?”
Just reject the “opportunity” if you don’t feel at peace with it.
Start Investing Now, No Matter How Small
The early years of working life (between ages 20-30) are surely the best time to begin investing. Ironically, this is also the time of your life when you have the least amount of money to set aside after deducting all your expenses.
However, no matter how little you are able to set aside, the time factor can make up for that. The concept of compounding interest will kick in to multiply your minute savings into a large retirement nest egg 20-30 years down the road.
It is also at this early stage of your working life that you can afford to take on higher investment risk vehicles. Should you incur losses due to a wrong investment decision, there is still ample time to start all over again.
Thus, even if you start with a small amount of money at this stage of life, you can invest in riskier investment vehicles to generate higher returns to make the most out of your small savings.
In fact, you have two choices to opt for:
(i) Go for a high-risk/return investment vehicle or
(ii) Settle with lower risk and safer investment (lower returns).
Your decision now should depend on your personal risk tolerance level.
Remember, always strive to set aside some funds, no matter how little, into a vehicle of your choice and set a target or milestone on the investment to help you monitor the progress and appreciate the fruits of your investment.
Most people did not understand the importance of starting early, and therefore have to compromise their lifestyle when they reached the stage of life when they intend to start a family.
Manage Your Risk: Cut Losses, Cash Out
The best-developed investment plan is useless unless appropriate action is taken to implement it.
Many people assume that they are capable of undertaking the implementation process of their investment plans all by themselves.
However, investing is not just about buying investment products alone. Knowing when to cash out is equally important. Similarly, knowing when to cut losses is also key.
Plus, not everything will turn out to be as planned. Circumstances change as well as the investment environment. Constant monitoring of the investment environment and the business environment is required if the investment objective(s) are to be met.
If the assumptions made in developing your plan have to change, due to the changes in the investment environment, then a reality check of whether the investment plan is still on track is required on a periodical basis.
Under such circumstances, having a professional consultant may prove useful as they can help review your plans from time to time.
However, the cost of engaging a professional investment adviser has to be considered carefully as the cost of their services is certainly an investment in itself!
In Summary
Evaluate your current financial position to assess where you currently stand.
Once you understand your current financial position and stage of life, determine your financial goals and objectives. Whether it is investing in a new house, retirement or children’s education fund, begin with an end in mind.
Before you determine what type of investment vehicle to choose, you will also need to assess your personal risk tolerance.
Combining all these factors will assist you in formulating your investment portfolio.
A wise man once said, “If you know where you want to go, no matter how far or how difficult the journey is, you will reach the destination one day”.
If you know your investment objective (whether it is for your retirement, children’s education, etc), you will make plans to achieve it.
How do you manage risk when it comes to investing? Leave us a comment below and share your experience with us.
