A question that I am often asked by young and old alike. This isn’t a simple question, and there’s no “right” answer. 

Let’s first understand what investment risk is. Investment risk is simply the chance that your investments might lose value.

Some types of investments, like equity, offer the potential for higher returns but come with greater uncertainty—they can rise quickly, but they can also drop just as fast. Others, like bonds/FDs or real estate, are generally more stable, though their growth tends to be slower and steadier. So the question is how do you feel when you see your portfolio’s value rise and fall due to market swings, or does that level of unpredictability feel overwhelming? Your comfort with these changes will have a big impact on your choice of financial products.

Without knowing your risk tolerance, you might end up taking on too much risk, creating unnecessary worry, or avoiding risk entirely, which could limit your portfolio’s potential.

By understanding your boundaries, you can make smarter decisions about your investments and better align them with your financial goals.

The amount of investment risk you’re willing and able to accept is impacted by a variety of factors and is unique to you. Let’s understand what these factors are;

Goal  – Firstly, what are you investing for? And how important is that goal for you? How much effort will you be willing to put it in it to ensure that you fulfil the goal.  For most of us it’s all about securing a better financial future. We do this by increasing our wealth, or at the very least preserving it, over the long term. And while we all have that same common goal, you’ll also have key personal milestones to aim for along your investing journey too. And that could be a certain home, car, holiday, college. Etc. So knowing your goals and what you want achieve from investing will help shape the overall risk profile of your investments.

Time – Now that you know your goals, you should have a ball-park figure for how many years you need to invest. The more time, the better. It gives you a better opportunity to reap the rewards of compounding. Investments tend to perform better over the long term. Any bumps in the road along your investment journey are smoothed out as the stock market has ample time to bounce back. Remember though, investing doesn’t come with any guarantees. If your time horizon is less than three years you should keep your money tucked away in safer avenues.

Attitude to risk – Understanding how much market volatility you can handle emotionally is just as important as assessing your financial goals. If seeing your portfolio drop in value causes stress or sleepless nights, safer investments might be a better fit. On the other hand, if you can stay calm and stick to your plan during downturns, you might be able to take on more risk for potentially greater rewards.

Ultimately, the right level of investment risk depends on your individual comfort and financial goals.

Keep in mind that your financial needs and comfort with risk may shift over time. Regularly reassessing your tolerance and adjusting your portfolio helps ensure your investments stay aligned with your evolving goals. By staying proactive and mindful of your risk preferences, you can navigate changes in life and the market while keeping your financial plan on track.