Are You Playing It Too Safe Or Taking Too Many Chances, Reader?

Hi Reader,

Welcome to The Money Series! If you are new here, thank you for signing up. Personal Finance can feel ambiguous and overwhelming, but I am here to help simplify the journey.

Last week, I was chatting with a friend who was frustrated. He had just started investing, and within a few months, the market dipped. To him, it felt like the end of the world. "I lost money," he said. "Do you think I should pull everything out before it gets worse?"

I asked him, "How much did you lose?" He paused and said, "Like… 5%." That's when I realized that it wasn’t just about the numbers. He was reacting to the feeling of uncertainty. The discomfort of not knowing how the market will pan out over time. And that's what risk tolerance is all about. It's not just about your goals or time horizon. It's about how you feel when things don't go as expected — when share prices fall, recessions occur, or your portfolio turns red.

Risk tolerance is your ability and willingness to ‘stomach’ fluctuations in your investments. It’s not just about how much you want to grow your money — it's about how you feel when things don't go according to plan.

Some people dismiss market dips as short-term fluctuations. Others may begin to panic. Some people can ride the highs and lows without flinching. Others need the peace of mind that comes with lower, more stable returns. It doesn’t mean that any of the reactions are wrong. But knowing where you stand can help you invest in a way that feels aligned, not stressful.

Let’s Test Your Risk Tolerance

Take a minute to answer these 6 quick questions:

1. What’s your main goal for investing? 

   a. Preserve my money (capital preservation)

   b. Grow my money moderately over time

   c. Maximize growth, even if it means taking a higher risk

2. If your investment dropped 20% in a month, what are you most likely to do?

   a. Sell everything and hold cash

   b. Hold steady and wait for the market to recover

   c. Invest more while prices are low

3. Will you describe your investment and market knowledge as:

   a. Minimal—I'm just starting

   b. Basic understanding

   c. Advanced comprehension

4. What’s your investing time horizon? 

   a. Less than 3 years

   b. 3–7 years

   c. More than 7 years

5. How would you describe your reaction to risk in general? 

   a. I avoid risk whenever possible

   b. I’m okay with some risk if there's potential for reward

   c. I embrace risk as part of the journey

6. What’s more important to you right now?

   a. Security — I want to avoid losses

   b. Balance — I want a mix of growth and safety

   c. Growth — I want my money to work aggressively

Now Score Yourself:

If your answers were:

Mostly A's: The Conservative Investor

• You prefer stability and lower risk, even if that means smaller returns. You should consider bonds, fixed deposits, and low-volatility funds.

Mostly B's: The Balanced Investor

• You're okay with some market movement as long as the long-term outcome looks good. A balanced portfolio - featuring low-risk investments such as fixed deposits and stocks - may suit you best.

Mostly C's: The Aggressive Investor

• You’re all in for growth and willing to take on more risk. Equities and growth-focused investments may align better with your goals.

You need to remember that risk tolerance isn’t static. You might be conservative today, but shift to a balanced investor as you grow more confident. You might be aggressive when you're younger and get more cautious as major life events (kids, retirement, etc.) occur. This is why it's smart to re-check your risk profile every year or whenever your life circumstances change.

Despite your risk tolerance, always ensure adequate diversification in your investments. You can diversify within the same asset class by spreading your investments across geography, for example.

Knowing your risk tolerance isn’t just about investing — it’s about peace of mind. When you invest based on your risk profile, you're less likely to panic in a downturn.

Reflect on This:

• If your investments could speak, what would they say about your current risk tolerance?

Till next week, I am rooting for you, money-ly!

Dee

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Disclaimer: This does not constitute financial advice. Please conduct your research or consult your financial advisor for important financial advice.