Do Your Investments Match Your Risk Tolerance?
When it is the question of how to invest money, one of the main concerns an investor may have before selecting an investment is whether their investments are in sync with their risk tolerance. This is because any investment should primarily be based on your risk tolerance and your risk profile. Risk tolerance, in simple words, means your investment portfolio’s ability to withstand market fluctuations that also affect your investments.
Hence, in case of losses due to market volatility, the investment portfolio should be able to balance these losses through other investment instruments. This essentially means that the resultant financial loss should not greatly impact the investment or the investor.
Before you start investing your money, always consider various investment options instead of solely relying on recommendations since another investor’s risk profile may not be the same as yours. For example, high-risk and experienced investors can opt for volatile market stocks and manage their asset allocation to hedge the losses that they may incur. Low-risk investors often opt for low-risk and long-term stocks or debt investments that invest in fixed-income securities and so on.
To ensure that your investments match your risk tolerance, first find out what type of investor you are. If you are a conservative investor, your risk tolerance is likely to be low, and you will need to seek out investment options that offer fixed and guaranteed returns. Savings insurance plans such as endowment plans, and money-back plans are apt for such investors. However, even aggressive investors with a high-risk tolerance opt for savings insurance plans that help them balance their investment portfolio risk and also offer the added benefit of life cover.
Matching your risk tolerance and your investments can help you invest your money in a more secure and disciplined manner. It also helps avoid confusion regarding different investment options since you only invest in instruments, plans, assets and schemes that are within your scope of understanding.