Investments are subject to market your risk taking capacity, please read the offer document carefully before investing.
The disclaimer statement that appears after every advertisement especially for Mutual Funds, may be sounding daunting, but is actually not, if you understand what it means. The moment people hear the word ‘risk’ in investments they recoil in fear. Seriously, we take higher risks in everything we do in our daily life, for e.g cooking at the gas stove, driving a car, riding a bike, or even crossing the road. Yet the word ‘risk’ in investments scares us away, and it’s not even life threatening!
When it comes to risk in investments, here’s a reality check: All investments carry some degree of risk. Stocks, bonds, mutual funds can lose value, even all their value, if market conditions sour. Even conservative, insured investments, such as certificates of deposit (CDs) issued by a bank come with inflation risk. They may not earn enough over time to keep pace with the increasing cost of living.
Understanding where you are on the Risk Tolerance curve is the most critical element for investing. Knowing your risk taking capacity is the key to safe investments. There are many risk profilers available on the internet that will help you create your risk profile. Or you could even check with Financial Advisor to do it for you. However, to begin with, four basic questions that I came across should be enough to give you an idea.
- How long until you need the invested money?
If you have 20-25 years to save and invest, it’s likely that you can handle a few market ups and downs along the way. This assumption changes a lot if you are just five years away from retirement.
- How long do you expect to work? To live in retirement?
Many people get to retirement age and are unable to quit working, having saved too little. If work is part of your retirement plan, you might be able to take on a little more risk than most investors your age. Also, consider how long you might live in retirement, considering the long life span. Running out of money in your later years is definitely avoidable.
- How do you react when markets go up?
Feel elated? Go on shopping sprees in celebration? Remember that you haven’t actually made any money until you sell those assets, and that might not be for decades to come. Likewise, some investors take a rising market as a sign to invest more heavily, even if stocks seem expensive.
- How do you react when markets go down?
Fear? Remember, you also haven’t lost any money unless you sell at a bottom. At this point, investors too tend to avoid investing as stock prices fall, which is contrary to the whole concept of “buy low and sell high.”
How will answering these questions help? Well, it will tell you how much risk you are willing to take for your investments.
Be true to yourself, and you can insulate yourself from the kinds of risks that will come your way during investments.
There are safety measures that you can take while investing as well.Just like the way you take safety measures such as seat belt while driving or helmet while riding the bike or even tandem sky diving!