Risk and survival are the two sides of the same coin for any human being. Starting from the moment we get up from our bed in the morning until we get back to our bed at night – we are exposed to different types of risks, and different degrees of risks. Some risks are controllable, e.g. we can avoid traffic by taking another route. And some are uncontrollable risks e.g. walking across a crossroad at the appropriate time and a distracted driver hits you. At times, we create some risks for our own, for example breaking traffic rules and getting hit by a heavy vehicle. The same type of risk also exists in investment decisions. You must have played a treasure hunt game wherein there are no clues and no map but you have to find the treasure. If you dive into investments without having a clear understanding of investment risk appetite, it is almost similar to a treasure hunt.
Understanding Investment Risk Appetite
As per the standard ISO 31000 risk management, risk appetite is the “Amount and type of risk that an organization is prepared to pursue, retain or take”.
Let us understand that saving and investing also possess a variety of risks, as mentioned below:
- Inflation risk is the risk that there will not be any boom in bank rates or money value.
- Default risk is the risk that the financial institute or bank in which you are investing will fall or go bankrupt.
- Interest-rate risk is a kind of opportunity risk that suggests that you would have earned higher if opted for other investment plans.
- Volatility risk is associated with fluctuating prices of the share market.
Knowledge of the above-mentioned risks, your attitude towards risk, investment goals, a time frame of investments, need for ROI and your personal circumstances together determine your investment risk appetite. And hence, investment risk appetite differs from person to person. It cannot be the same for two persons having similar income or similar investment plan. Because the capacity of an individual to bear the loss, his/her investment goals and perspective towards risk play an important role in determining investment risk appetite. Among all, human perspective and attitude to risk are highly subjective and pretty difficult to measure.
Deciding investment risk appetite
Your financial advisor is your go-to-guide in determining risk appetite for investments. It is different than the risk tolerance. And you should not confuse between the TWO. For example, your friend might have an appetite to eat 5 sandwiches at a time. However, your other friend actually cannot have more than 1 due to his sensitive health condition. Assume if your other friend is still going to have sandwiches despite sensitive health conditions, he is welcoming the risk of an immediate health complication increases. Here, Risk appetite for your other friend is the willingness to take an investment-related risk (eating only 1 sandwich) whereas risk tolerance means the actual ability to take that risk (eating 5 sandwiches at a time).
Go ahead with the smart way to save and invest
Your investment risk appetite is how comfortable you might be with certain investment options. There are a number of offers you will get for a number of funds to invest in. However, make sure that you consider the option that is easy for you since you are a newbie in this investment zone and have to take care of your investment risk appetite. Evaluate your investment options from al possible risk and return angles. And go for the one that is right for you. Remember, whenever there are experts who are in charge of your money management, you can definitely expect a handsome level of returns and that too inline with your investment risk appetite. Keep in mind that your investments may go down in value as well as up and you may get back less than you invested.
Article Provide By: Accume Partners