Good to Great: How to Scale With an Outsourced CFO

Risk is an unavoidable part of investing. 

Whether you invest in stocks, crypto, bonds or real estate, you can't guarantee a specific return on your money. 

Risk means you either make no money, make less money, break even, or get a return on your investment. It's a risk because you're never 100% certain of the outcome. 

Nobody is risk-immune. 

The key to successful investing is managing risk effectively. Understanding your risk appetite is crucial, as this will help you tailor your investment portfolio accordingly.

Don't know what your risk appetite is? This article is for you. We'll shed light on the meaning of risk appetite and how to understand your investment risk appetite. 

Keep reading to learn more.

 

What is Risk Appetite?

Risk appetite is the degree of risk an investor is willing to be exposed, to achieve a particular financial goal.

So, what's the logic?

If you have a high-risk appetite, you're willing to lose high amounts of money to gain multiples of the amount invested. On the other hand, a low-risk appetite means you're unwilling to lose much money (or any at all).

 

Types of Risk Appetite

Aggressive Risk Appetite

An investor with a high-risk appetite is willing to lose vast amounts of money to get potentially huge results. An aggressive investor is usually one of two things:

1. Looking for a get-rich-quick opportunity
2. Highly knowledgeable and isn't bothered about the market conditions

Check-In Question: Are you open to risking a lot of money to make more money? If your answer is yes, you've got a high-risk appetite.

Moderate Risk Appetite

An investor with a moderate risk appetite is comfortable with risk but isn't willing to lose too much money. He doesn't take on more than he can handle. He carefully weighs his options and only invests the amount he's willing to lose.

Check-In Question: How comfortable are you with losing money? Are you a minimalist? Or you’re somewhere in between? 

If affirmative, then you've got a moderate risk appetite.

Low-Risk Appetite

A low-risk investor is the most conservative of all. He doesn't mind gaining small profits. As long as he doesn't lose his investment, he's comfortable. An investor with a low-risk appetite builds his portfolio with low-volatility instruments that only bring gradual returns.

Investors with this risk profile are usually much older and less wealthy. Other times, such an investor might be new to the investing world and prefers slow and steady profits.

Check-In Question: 

• Does losing money bother you more than gaining money? 
• Would you clench your fists at the thought of losing money? 
• Do you prefer making small profits slow and steady rather than making big profits (but with a higher risk)? 

If affirmative, then you're a low-risk investor. 

 

How to Understand Your Investing Risk Appetite 

Several factors determine your risk appetite. This includes income level, age, investment expertise, investment strategy and lots more.

Can't identify your risk appetite? Then answer the following questions.

• Am I financially buoyant enough to invest?
• How much money can I put aside to invest?
• Am I willing to lose all this money if the market goes south?
• Would I be intensely worried if I lost all my invested money?
• Can I afford not to check my investments daily?
• Do I have other stable income sources?
• How many people are dependent on my finances?

Consider Your Age

More often than not, young investors entertain higher risk than older investors close to retirement. 

Why is this? The logic is simple.

Younger investors have more time to recover from market losses or downhills, while older investors have limited time. Hence, older investors are more fixated on preserving capital. 

Consider Your Financial Capacity

You don't have to invest just because everyone on the block is investing. Do you have a stable source (or sources) of income? The first rule is to only invest an amount you're willing to lose. 

Consider if you have other assets like social security, pension, home or other sources of stable funds (that can serve as a shock-absorber should a loss happen). 

What is Your Investment Objective?

If you're investing toward a particular goal within a fixed period, you may have a conservative or low-risk appetite. But if you have enough money and investing is not a survival avenue, your risk appetite may be relatively high.

 

Finding the Balance Between Risk and Reward

Shying away from risk will give you steady small profits, shield you from inflation, or keep your portfolio at break even. And on the other hand, risky, high-yield investments can bring massive rewards but can also wreck your portfolio. 

Keyword here? Balance. 

Have a portfolio that is a mix of both worlds.

Low-risk investments can neutralise losses from riskier investments or preserve your portfolio's value while you await returns from riskier investments. 

In balancing your portfolio, it's always best to get financial advice from experts. A financial expert will help you build a robust and well-balanced portfolio.

 

Conclusion: Make Informed Decisions

Everyone has a unique financial situation. 

Some people love the thrill of taking on big risks and will feel comfortable even if they lose everything they've invested. On the other hand, others seek a cautious approach where they aren't willing to lose what they invest. 

And as you grow older, richer and more informed, your risk appetite will most likely change.

However, always seek expert advice and guidance. A financial advisor will educate you on the best ROI-worthy risks to take, while also helping you develop an investment strategy that aligns with your risk appetite and financial goals. 

Altus offers financial guidance that steers you in the right direction, no matter your financial journey or path in life. Whether you're looking to protect or grow your wealth, Altus has got you covered. Have a chat with us to kickstart your journey to financial freedom.