Investing In Line With Your Risk Profile
Have you ever heard a friend put money into an investment and thought “ wow, that’s cool!”.
Or perhaps you heard a friend talk about a specific investment and how it will “definitely make money” and you decided to jump onto the bandwagon too?
When I was young and just started working as an adult. I knew the importance of investing but I did not know how to start. At that time, I had some contacts working as remisiers (or stock traders) who were always ready to dish out “hot tips” for some unknown, penny stocks which were newly listed in the stock market. Being eager to get started, I took action on some of these “hot tips”, crossing my fingers that they would do well.
In the end, I got a mixed bag of stocks in my portfolio. Stocks which traded up for a short while and suddenly loss making. Stocks which were not moving at all and had low liquidity. I had them all. I realised that the stocks which I had bought from “hot tips” were often the loss making ones. Those that I picked on my own as an amateur investor, after doing some research, were in fact doing much better.
The result of following hot tips was that I ended up with a portfolio which I didn’t know what the next steps were. I felt lost and fearful about my investments. This is in fact one of the most common beginners’ mistakes for new investors.
If you had bought stocks from “hot tips”, you are definitely not alone. From my coaching, I came to realise that many people started their portfolios this way.
The problem is that someone may tell you when to buy a stock, but they will hardly come back to tell you when to sell to take profits. Or even, they might avoid you if the stock they had recommended is lost making.
You may end up with what I call a “cobweb portfolio”...a portfolio of investments which you are clueless about. You realised that you do not actually know what your hard earned money had gone into. You hardly check in with your portfolio. Hmm…you have no relationship with your investments.
Now that I’m older (and wiser), I know how important it is to “Invest in line with your risk profile.”
What is suitable for your friend may not be suitable for you just because you may have very different risk profile from your friend.
Every investment carries some “risk”, or possibility of a financial loss. No matter how seasoned an investor is, they are still subject to investment risk. Risk will include regulatory risks, political risk, interest rate risk etc.
There are actually 2 parts to a person’s risk profile.
The willingness to take risks and the ability to take risks.
The willingness to take risks is influenced by your personality and money mindset. So it is a measure of your risk aversion. How much do you LIKE or not like to take risk? How affected are you by potential losses?
If you are interested to find out your willingness to take risk, take a FREE assessment here.
On the other hand, the ability to take risks is more factual and based on factors such as your age, your financial goals, time horizon, your net worth as well as your financial knowledge. In fact, the more knowledgeable you are about investing, the higher will be your ability to take risks.
So what happens when your willingness to take risk and your ability to take risk are different? One is high and the other is moderate or low. In that situation, go with the lower risk profile because you want to make sure you can sleep well at night.
Since everyone has a different risk profile, it is important for you to learn how to make your own investing decisions, which fits your personal risk profile. An investment which is suitable for someone else may not be suitable for you.
Make sure you don’t commit the beginner’s mistake of blindly following someone’s else trades. Learn more about yourself and your risk profile. Learn more about suitable investments for your risk profile.
Start slow, start safe, that is the first step to confident investing.