The key to successful investing is understanding and managing various investment risks. Taking on too little investment risk means you may not achieve your financial goals, while taking on too much risk means you might lose money you can’t afford to lose.
Risk appetite is the amount and type of risk that an organization or individual is prepared to pursue, retain or take. Having a risk appetite helps you allocate your hard-earned money in an investment that will attract maximum return but keep you comfortable as an investor.
It is important to consider the following questions when starting your investment journey.
1. What can you afford to lose?
Ask yourself what would happen if you lost some or all of the money you have placed into your investments. The more you invest in high-risk assets such as shares, the more growth potential you have – but also, the more chance of a capital loss.
How much you can afford to lose also depends on your circumstance. Do you have dependents? Any other financial obligations? How much money are you investing? All these circumstances will determine what you can afford to lose.
2. Have you determined your goals and timelines?
Your saving and investing choices will depend on your goals and timelines. Taking no risk might make your goals impossible to achieve while taking too much might lead to losing your investment.
The required risk level is also influenced by how important the goal is to you. A goal that is absolutely critical to achieve tends to mean you will need to take a lower-risk approach, whereas a discretionary goal allows for more risk to be taken.
3. Do you know your risk attitude?
Your personal attitude to risk is subjective, and likely to be influenced by your investment experience and past events.
There are mainly three types of risk attitude.
- Risk Seeker – People who enjoy risk. They don’t worry too much about repercussions if the risk materializes. They are more focused on the benefits they are going to get. This type of investor is mainly interested in capital growth.
- Risk Averse – Risk Averse people don’t like uncertainty. They intend to take the path that is most certain even if it is least rewarding. When it comes to investing, their main concern is capital protection.
- Risk Neutral – Risk Neutral people are quite calculative and they weigh all pros and cons before deciding to take risk or not. This investor is mainly interested in income generation.
Based on your risk attitude, there are three investment profiles that suit you best ranging from low, medium or high risk investments.
High risk is where there is a high percentage chance of losing capital, but equally high chance of reward, – like stocks, or Bitcoin. Medium risk is usually middle to long-term investments with moderate returns. While low-risk investment offers security because the return is also low.
Understanding your risk appetite to risk allows you to invest more comfortably. Understanding your capacity for loss and how much risk you need to take to meet your goals will provide a more objective picture of where you can invest your money.
Visit our Koa website to learn more about saving and investing and how to get started on your investment journey.
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Boilerplate:
Koa is a digital savings app, designed to offer Kenyans an easy way to put money aside toward their goals and earn higher interest. Koa is on a mission to make savings and grow your money, simple, seamless, and hassle-free. Through our partnership with Britam Asset Managers, we allow users to build financial wealth and plan for long-term financial goals.
