The myth
Risk is one of the most important things to consider when you invest. It helps you see which products you can choose from, and also affects how much money you might make by investing in a product.
That’s why some people believe that you should invest to the highest level allowed by your risk profile.
Why do people believe it?
In general, the more risk that you’re willing to take with your money, the higher the potential profit is. If the risk of a certain product is acceptable to you, you may earn more by investing in it as compared to another product which has less risk and lower potential rewards.
But even though you can take the risk, should you? It all depends on your money goal. If you could reach the amount that you need by the time you need it by investing in a product that has a lower risk suitability, that means you’ll expose your money to less risk without compromising your goal.
For example, imagine that your risk profile is Aggressive but you could reach your goal by investing in government bonds, which fit a Moderate risk profile. In that case, you wouldn’t have to choose an investment vehicle with a higher risk suitability, even if it still matches your risk profile.
Risks of believing this myth
If you believe in this myth, you may end up exposing your money to more risk than you need to. Even if it’s at a level that’s still comfortable for you, there’s absolutely nothing wrong with choosing a product that fits a lower risk profile if it may still help you reach your goal.
This means that people with a Moderate risk profile may invest in a product that matches a Conservative risk profile, and an Aggressive investor can still put money in products that fit Moderate and Conservative risk profiles.
Verdict: It depends.
While the risk suitability of an investment product is very important, it shouldn’t be the only thing you look at.
If the asset has the potential to help you achieve your money goal while not exposing your money to more risk than you’d be comfortable with, then you can consider adding it to your portfolio. Remember also to practice diversification to help spread your risk around further and reduce any potential losses.
