So you’ve started your investor journey. But before you start choosing investments, you need to consider the risks involved, as well as how much or how little risk you’re prepared to take with your money.
Risk essentially means the degree to which you’re willing to lose some or all of the money you have invested. Investors take risks to earn dividends, interest, or capital gains to increase the value of their investments over time.
Could be a short time or a long time.
It’s important to note that all investments come with risk. Generally, the higher the potential return an investment might offer, the higher the risk.
When you take on greater investment risk, there’s no guarantee that you will actually get a higher return.
So what is risk tolerance and how does it relate to you?
Your risk tolerance is the level of variability you are comfortable with in order to achieve your investment goals, and it’s different for each person.
Identifying the types of investments that fit your risk tolerance is an important piece of work that you and your registered investment advisor. if you choose to use one. do together when building a portfolio and determining your investment strategy.
There are three factors that affect risk tolerance:
- Time horizon is the amount of time you have to meet your financial goals and to make up for any losses you might experience. An investor with a long time horizon may be more willing to accept more risk than someone who is saving to meet a short-term financial goal.
- Cash requirements are the extent to which you depend on your investments to meet day-to-day expenses. Investors who rely on their investments to meet daily living expenses will likely be much less comfortable with the risk of losses.
- And of course, emotional factors, which are your emotional responses to changes in the value of your investments.
Risk and investment return are connected. If you have a low risk tolerance, you will likely choose a more conservative growth portfolio with less volatility. If you have a higher risk tolerance, you will likely choose a riskier portfolio with a higher potential return and higher volatility.
Remember to pay attention to risk as well as return. If you focus only on achieving the highest possible return, you may not recognize the risk you’re taking.
Over time, your risk tolerance may shift as your financial circumstances change and you grow more knowledgeable about investing.
For example, life events like getting married, having a child, or preparing for retirement can make you rethink your risk tolerance and overall investment goals.
Have questions? Reach out to the BC Securities Commission.