We live in an era where everyone wants to make a quick buck, allowing us to be easy targets for marketing gimmicks. Are you wondering what am I talking about? Take a wild guess! Yes, I am talking about Mutual fund and Stock market investments or, any product that is associated with stock markets.

Investing in mutual funds and the stock market can be rewarding but also expose us to the risk of losing some or all of our investment. Most of us just log on to apps and sites that ask a few perfunctory questions before recommending a product or portfolio they want us to buy. We are even made to believe this truncated and hurried approach is planning. Only a few of us can tell that success lies in measurement and tracking. In this post, you will learn what risks we need to measure before investing.

Risk Appetite

Everyone has a different capability of taking risks. Alex who earns say, 20K per month, and contributes 50% of salary to living expenses is left with only 10k of savings. There is not a lot of risks he can take with those 10k savings. On the other hand, Karen earns 100K per month and spends 30K every month, she has a lot of capital to consider for risky investments. That’s not it, the time horizon can also vary from person to person. So if the risk appetite and objectives are clearly established and every goal that matters is carefully constructed, our investment process will have better clarity.

Risk is like fire! If controlled it will help you; if not controlled then it will go wild and destroy you.

– Theodore Roosevelt
Things we need to consider while assessing our risk appetite:
  • Our age
  • Family’s dependency on our earning
  • Liabilities
  • The time horizon of investment
  • Emergency funds for us and our family
  • Short term goals and expenses

Risk Tolerance

Although closely coupled with risk appetite, risk tolerance is an after investment process. It measures how much of a loss an investor is willing to endure within their portfolio. Those with a higher net worth and more disposable income can typically afford to take greater risks with their investments. Simply put, someone who is rich, well settled, and has set aside a lot of inheritable property for the family can tolerate huge losses for taking high risks whereas someone who is the only earning member in the family with a lot of potential future expenses like sibling marriages, parents healthcare, etc. should be planning well to limit the losses from investment.

Financial Planners

One time fee financial planners can be definitely approached to help us set sail on our journey towards financial independence. Mind you, they will only charge you once for consultation, most of the time it is a fixed charge. They help you set up a base for your investment. They often start with risk profiling of individuals and are good at it. One thing I did not bring up while discussing the risks is the role of insurance. The financial planners also help us insure as per the need as well. I strongly recommend you to visit a one-time fee financial planner to build a investment strategy for long term.