What is your Risk appetite?



Whenever I landed a new client, one of the first things we talked about was the client's personal risk tolerance level.

There was actually a questionnaire form that my assistants would get from clients which had different "get to know you" questions. Some of the things on this form were basic info such as spouse, kids names and ages, et. al. Others were investment style questions.

The first "investment related " get to know you question was, "What is your risk tolerance?"

IT IS AN EXTREMELY IMPORTANT QUESTION!

What is 'Risk Tolerance'

By definition, risk tolerance is the degree of variability in investment returns and losses that an investor is willing to withstand.

My interpretation: how willing are you able to accept losses to your investment?

This is a question that every investor needs to ask themselves BEFORE starting investing.
They must answer this question HONESTLY.
There are no wrong answers.
The biggest mistake you can make is lying to yourself.

You must have a realistic understanding of your own ability and willingness to handle risk in your investments before getting started in investing otherwise you are setting yourself up for doom.

For example, if you consider yourself to have a "low risk tolerance", and you end up investing in highly risky stuff, you might and probably will panic when your investments go down - even if its just temporarily. It might cause you stress and worry or other issues. You may end up making a higher return on your money or you might lose most of your investment.

The above pyramid picture is a good way to match your risk tolerance level to the things you invest in.

One thing the picture is missing is Crypto Coins which would be at the highest risk level. Perhaps even above the highest level into the realm of gambling.

So ask yourself and answer honestly - before you start investing:

What risk tolerance do I have?

High risk tolerance =  high rewards and high loss potential
Low risk = low rewards or lower loss potential
Moderate risk = somewhere in the middle ground

Once you answer this question, only stick with investments that fall into your risk tolerance level.

Your risk tolerance is not a permanent decision - it's how you feel now.

Feelings change all the time. In fact, I use to review my client's risk levels once a year just to be sure nothing had changed either higher or lower.

Remember though, you must be honest with yourself.
____________________________________________
As I close this post, I want to remind beginning investors of the below shenanigans because I do not want you to fall into these traps. I'll keep saying it because this stuff is happening all day, everyday.

It's your money, please be smart about it:

MANY times you will see people brag about how much money they made and how quickly they made it. These are ultra high risk tolerant people trying to sell you on something. Even if it is true that they made a good (or lucky) trade, why share it if not to try to sell you?

If you see someone doing this, think about how much LOSSES they also made. Because people who make a lot money quickly also lose a lot of money quickly.

A lot of salesman and services nowadays are trying to sell beginning investors on buying into Crypto Currency through their company.

I see it all the time like:  "Give me $1,000 and I will triple it in 3 days!"

By the way - saying stuff like this is borderline illegal. You cannot guarantee an investment. Setting a guarantee on crypto trading is like promising you will win on your next spin on a single number at a roulette table at the casino. Sure it's possible, but.....the odds are heavy against you.

Once again this shows up on Investing For Beginners Facebook boards, probably others. Predators  target beginning investors because they are the most prone to these get rich quick scams. Be careful.

____________________

Keep Track Of Your Net Worth: Hopefully you now know a little bit more about risk tolerance. Now the easiest way to grow your wealth is to know where all your money is going. Sign up for Personal Capital, the best free financial tool on the web. I use them and have seen my income and net worth blast off. They keep me motivated to budget, spend and invest wisely.





Comments