How much risk should you take with your investments?
Posted by: Arti Bhargava on Oct 02, 2017, 12.59 PM IST
Vidhi and her husband are both bankers. They have been saving for various financial goals over the past few years. However, they are wary of taking risks and all their money is lying in bank deposits. While the idea of taking risks with their money makes them uncomfortable, they know that it’s necessary to generate better returns.
They had to postpone a vacation because they didn’t have enough surplus. Now they’re considering investing in a product that offers high returns, so that they can generate enough surplus money for the vacation and other goals. Is there a way for them to identify the investment risks that are worth taking?
It’s a very good sign that the couple is willing to take some risks with their investments. This will allow them to identify different investments to help them meet their financial goals. The first thing they need to do is to segregate their goals. A good way for them to categorise them is by looking at how much time they have to reach each goal.
Some of their goals may be short-term, such as the vacation they are saving up for and may require the funds in the next few years. Other goals such as plans to accumulate funds for the down payment for a home, have a medium time frame, while retirement goals are typically long-term ones.
Assigning time frames to goals will help them decide how much investment risk they should take for better returns. This is because some investments may give high returns, but they may be volatile in the short term. Such investments require a sufficiently long investment horizon over which the volatility can smoothen out.
As they already have, the couple may be tempted to buy into high return investments for their short-term goals. But the risk in doing so is that is they may find that the value of her investments has dropped when they actually need the accumulated funds.
By aligning their investments with the time horizons of their goals, they will be able to ensure that the level of risk they take on is reasonable. It’s not so hight that their savings are at risk, and not so low that they fail to accumulate enough to reach their financial goals.