How much risk can you take when investing? Here's how to find out
Posted by: Arti Bhargava on Apr 09, 2018, 11.14 AM IST
Roopali Gupta and her husband are software professionals. Unsure of how much risk they were capable of taking, the two have parked all their money in bank deposits.
However, they do realise that in order to generate better long-term returns and meet various financial goals, they would have to take some risks. They want to know if there is a simple way to identify the amount of risk they can take.
Willingness to take risks will help the Guptas identify suitable investments for their goals. To start with, they should earmark each goal. A good way to categorize the goals would be to sort them according to the time left to achieve them. Some goals may be shortterm, such as holidays, that would require funds in the next few years. Other goals, such as plans to accumulate funds for the down payment on a home, have a medium time frame while retirement goals are typically long-term.
The time frame will help them decide how much risk they can take with their investments to earn better returns. Some investments may give high returns over the long-term but can be volatile over the short-term. The Guptas may be tempted to assign high return investments for shorterterm goals. However, the risk in doing so is they may find that the value of their investments has dropped when they need the money.
While selecting investments based on the time horizon, the Guptas must remember that a longer investment horizon alone does not make a fundamentally bad investment less risky. They must choose sound investments after evaluating their strengths and features. They must also shift to lower risk investments as a goal draws near. By aligning investments to the time horizon of goals, they will be able to earn good returns without taking on too much risk.