All investments carry some amount of risk. It varies for investor to investor. It depends on age, income, fixed expenses, the number of dependents in the family, net worth etc.
We often hear that people should invest in assets depending upon their risk-taking ability. But what is one’s risk-taking ability? or how much risk one can take? Or even one’s risk remains the same till the goal is achieved? There are many questions to be answered.
Risk taking ability should purely depend upon one’s goals & one’s current financial condition. One must classify goals into short term, medium term and long term to arrive at a risk.
Making a right investment choice is never easy. If the goals are short term, it is better to invest in fixed income. If the goals were for medium and long term, a certain amount of risk would be taken in order to improve return on investments.
Risk taking abilities will also depend on the age factor. Younger & middle age investor can take more risk compared to old age investor.
The problem arises when people tend to lose focus of their goals, they start investing to gain immediate returns. This changes the risk-taking ability drastically & the entire planning fails. So, deciding what amount of risk can be taken while remaining comfortable with investments is very important.
A common misconception is that higher risk is equal to greater return. There can be a possibility to get higher returns but there cannot be any guarantee.
Risk taking abilities plays most important role to achieve the goals in a disciplined manner for which the particular investment is to be done.