How Much Can You Risk When Investing?

Sep 03, 2018 | 10 months ago | Read Time: 4 minutes | By iKnowledge Team

Avoid Risk When Investing

When it comes to investing our hard-earned money, we’re often very cautious and hope that we can maximise the return on our investments without taking too much risk. Given the wide variety of investment options available, from mutual funds to bank deposits and government bonds, one is likely to get overwhelmed while making such decisions. Plus, the plethora of investing advice we receive from friends, family and financial experts can leave us feeling confused rather than understood.

To ease you out of your dilemma, a great way to start is by calculating your risks with an income tax calculator. Also, when you are investing your money, understanding the following factors will help you decide how much investment risk you can take while planning out your financial future:

Goals: short term and long term

One of the key things you need to establish before embarking upon your investment journey are your short and long term financial goals. Short term goals could include, things like holidays and long term financial goals could include paying for your child’s education, buying a vacation home amongst several others.

Establishing these goals are critical to your financial plan as they will help you understand how much money you have and much you will require in the future to achieve your goals.

Often it might be a good idea to prioritise your goals and set up different investment portfolios accordingly. For instance, if your long-term goals include providing for your child’s future and buying a second vacation house, it is likely that you prioritise the former.

In such a case, you might get the best overall return on your investment if you invest a part of your savings in a Unit Linked Insurance Plan (ULIP). Aegon Life’s iMaximize plan o

ffers a combination of protection for your life as well as market linked returns from six equity and debt-based funds. Understanding which of your goals you can take more risks with is key to determining the balance of your investment portfolio.

Time horizon

Another very important factor which influences the amount of risk you can take while investing is the time frame you have. While some investments give you better long-term returns, they can be volatile over the short term, making them vulnerable to sudden shocks in the market. It is advisable to invest money in such investments only if you are secure about your short-term finances. Although often it can be tempting to assign lucrative high return investments for the short term, this comes with a high level of risk.

Alternatively, it is also important to remember that simply if an investment has a longer investment horizon, doesn’t mean it is less risky. The risk factor of an investment is influenced by many more factors.

If you have the luxury of a longer time horizon, you have the added advantage of being able to invest in riskier investment options as even if you make a loss, you have more time available to recover these losses and you will not have to sell out your investments at a lower price to make ends meet.

Bankroll

In simple terms, this can be summarised as the more money you have, the more risk you can afford to take. The amount of money you have in your hand directly influences your ability to take risk and how much loss you can stand, also known as your risk tolerance. The types of investment risk you can take depends on your overall net worth as if you have a higher net worth, you will be less affected by a decline in your investments.

Risk pyramid

After you finalise your risk assessment using the above factors, you can use the risk pyramid method to balance out your portfolio.  The bottom of the pyramid supports your entire financial plan and should be low risk substantial investment for your prioritised goals. The middle tier includes medium risk investments which do offer you a stable return but also have room for capital appreciation. The top most part of the pyramid is not only the smallest part of your portfolio but also the most vulnerable.

Risk Investments

Credit: Investopedia

When deciding your ability to take risks in your investments it is also very important to remember to review your financial plan from time to time as your ability to invest and take risks is variable and changes throughout depending on changes in your income, family status, lifestyle, economic climate, market risks amongst other factors. Deciding your risk-taking ability is not a one-time job and needs to be updated along with your financial plan.

To know about AegonLife’s life insurance products liketerm insurance plans and saving plans visit our home page.

Advt. no: II/Aug 2018/4346


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