The myth
Taking risks can be scary, especially when it’s possible for you to lose some or even all your hard-earned money.
Since risk is inherent in investing, becoming an investor means you must accept the possibility of losing money. However, not all investment products are created equal.
Some products have a higher level of risk while others are considered safer. That’s why many are advised to take calculated risks and never go beyond what’s necessary.
The reality
There’s the amount of risk you can handle emotionally, then there’s the risk level you can take given your financial situation and goals. These may not always be the same thing.
Your risk profile should be your guide when choosing investments that match the amount of risk you can withstand, considering both your emotional and financial capacity.
It can tell you how much is “necessary” or well within your limits and how much is probably too much. However, that doesn’t mean you can only pick investment options that exactly match your risk profile.
For example, even if you’re an Aggressive investor with a high tolerance for risk, there can still be room for Conservative or Moderate products in your portfolio.
You may do so because you have liquidity needs, a short-term goal, or just to balance out your portfolio.
Another thing to consider is your money goal, or the amount you want to achieve by investing. In general, investment vehicles that pose a higher degree of risk tend to offer higher potential returns.
Look at the risk level required to achieve the returns you aim for, then compare that with your comfort level. If it’s possible to go for a lower risk product while still earning enough to meet your goal, then it may not be necessary to take on more risk.
If there’s a gap between the required risk and your tolerance for it, then you may need to revisit your goal or strategy and consult experts on the best way forward.
Verdict: True.
Though investing naturally comes with risks, not all are created equal. It’s always best to identify the right balance of risk and reward with your situation and financial health in mind.
Remember to look at the bigger picture and take only the risks that might help and not hurt your future.
