You take a risk when you invest money since all investments have a chance of losing money. To avoid putting more money at danger than you are prepared to lose, it’s important to assess your risk.
This idea is illustrative. If you invest $9,000 in a high-risk venture with just $10,000 to your name, you run the danger of losing practically all of your money. A $10k loss wouldn’t wipe out your whole portfolio if you had a $1 million portfolio, thus investing that much in a high-risk investment would not be seen as all that dangerous. 1
As you can see, risk assessment is as unique as your financial objectives. In fact, knowing your schedule and your financial objectives, which include how much money you need based on what you want it to support, are key factors in evaluating your risk tolerance. You can afford to invest in more aggressive holdings if you are young and won’t need your investment money for at least 10 years as opposed to if you need it in six months. An investment has greater time to bounce back from occasional losses the longer you hold it.
The last risk factor to take into account is how much market volatility you can handle. If you constantly check your portfolio and feel anxious when the market dips, you could do better with a more balanced portfolio. Please feel free to get in touch with us if you’d want a professional assessment of your risk profile based on these variables. Establishing your financial objectives, risk tolerance, and timeframe for reaching them are the initial stages in building a proper investing portfolio.
It’s critical to comprehend the numerous sorts of danger that exist in the financial markets in addition to your own particular approach to risk. For instance, if you invest in bonds, you should be aware of credit risk, which is assessed by unbiased rating organizations that assess the viability and financial stability of different bond issuers. The agencies assign each a rating based on the chance that the issuer would miss bond payments. The issuer is more trustworthy the higher the rating. To offset the increased risk, lower-rated issuers may offer greater rates on their bonds. 2
Ratings for risk take into account more than just the capacity to fulfil financial commitments. Consider Russia as an example. As soon as the conflict in Ukraine started, the United States and other nations placed extensive restrictions on Russian persons and corporations, effectively blocking their ability to conduct business abroad. As a result, Russia’s firms lost their capacity to trade with other countries, decreasing prospective revenues and raising investor risk in those companies’ stocks and bonds. As a result, Russia’s ratings declined. In addition to Russian insurance businesses, the Russian government itself was downgraded because of its diminished capacity to pay off debt commitments.
Investors can use a variety of tactics, including diversification, strategic asset allocation, and recurring rebalancing, to lessen the risk associated with their investments. In the end, though, investment risk might not completely disappear. The fundamental tenet of investing is to leverage a small sum of money to possibly gain a larger sum, and there is always the possibility of risk involved.
Content prepared by Kara Stefan Communications.
1 TD Ameritrade. January 10, 2022. “Risk Management: The Un-Fun, Must-Know Part of Trading.” https://tickertape.tdameritrade.com. Accessed April 10, 2022.
2 Fidelity. “Bond Ratings.” https://www.fidelity.com. Accessed May 4, 2022.
3 Bill Chappelle. NPR. March 3, 2022. “Russia’s credit rating is cut to junk, and the dollar hits a new high vs. the ruble.” https://text.npr.org. Accessed April 10, 2022.
4 Fitch Ratings. March 14, 2022. “Fitch Downgrades 6 Russian Insurers.” https://www.fitchratings.com. Accessed April 10, 2022.
