Knowing your risk tolerance

Written on September 21, 2009 – 10:20 pm | by Kampung Boy |

To be an investor, it’s crucial to know your risk tolerance. Risk tolerance is the amount of uncertainty that an investor can accept or handle to a drastic change in the value of your investments.

There are basically 4 categories of risk tolerance for investors.

Low Risk

Investors that takes the least risk. Low risk investors will usually invest their money in fixed deposits, bonds and money market kind of investments.

Moderate Risk
Investors in between the low risk and high risk tolerance group. Usually investors will invest in investments like Amanah Saham Malaysia, Amanah Saham Wawasan 2020 or those high yield dividend stocks.

High Risk

Forex and share market are two of the best examples of those high risk investments. High risk investments generally means higher gains in a shorter period of time.

Mixture

Some investors like to mix their risk tolerance. Low risk investments with high risk or maybe moderate risk together with high risk.

Usually, risk tolerance decreases when age increases. Let’s see how this statement works.

26 years old investor
High risk forex investor lost all his savings through his investments. With age on his side, he has roughly 30 years before he retires. Has more time to get up back from the fall.

That is why generally younger people have high risk tolerance. High risk, high gain.

55 years old investor
High risk share market trader, lost all his savings and epf money and is already retired. With roughly around 20 more years to live, do you think he has the time and energy to rise again from his financial fall?

That is why older generation people tend to have low risk tolerance towards investment. They don’t mind lower gains as lower as the risk is kept to minimal.

As for me, i am only in my mid twenties and i am a gung ho high risk investor, mainly on the share market. I see that age is on my side that is why i am willing to take higher risk to get higher profit.

So what’s your risk tolerance?

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