When you first start making investments, it’s sensible to engage the services of an experienced broker or financial adviser who understands the markets and can offer you helpful advice on how and where to invest your money. There are now so many available options when it comes to making investments that trying to negotiate your way around them all and make the best choices can be something of a minefield. One of the key pieces of information your adviser or broker will need to know is how you feel about risk, and they will usually ask you a series of questions to gauge how risk averse you are. This is a vital part of your investment strategy, so it’s important to understand what risk isall about.
What is risk?
We all understand the basic definition of risk: the likelihood of harm occurring as the result of any given action. Extreme sports represent a high level of risk for example because you are more likely to have an accident and injure yourself than with more sedate sports. However, no activity is without any kind of risk. Crossing the street, getting out of the bath, reading a book are all safe, everyday activities that nevertheless could result in being run over, slipping and breaking a bone, or scratching yourself when you turn a page. In investment terms, risks are financial rather than physical, but the principle is exactly the same. There are no rock-solid investments that guarantee you will never lose money; even the most sound of prospects has the potential to fail. In calculating the risk level of any given investment, you need to compare the likely rate of return to the likelihood of loss, and in investing, as one goes up the other almost inevitably goes up as well, and vice versa.
Finding your risk level
Your position on risk will form the basis of your decisions on what kinds of investments to choose. For example, cryptocurrencies are a hot ticket at the moment, and it’s possible to make good returns on your investment when you buy Bitcoin or its alternatives. However, the market is highly volatile, so the value of Bitcoin rises and falls dramatically on a regular basis. If you time it just right, however, you could do very well, but if you get it wrong, you could find that a great deal of the value of your holding has been wiped out overnight. The appeal of making a high return in a relatively short space of time has tobe balanced against the risk of losing your money, and that is where your risk aversion level will manifest itself. How much would you be willing to lose if the worst came to the worst? If you hate the idea of losing your money, it’s best to stick to low-risk investments and play the long game. If you have plenty of spare cash and view the loss of it as a chance worth taking, you might find the thrill of the high-risk investment is more your style.
There’s no right or wrong answer to the question of how risk averse you are; the important point is to make sure your investments are made at a level that is right for you.