Under the Patronage of
Vice-President and Prime Minister of the UAE and Ruler of Dubai
When investing in any market, your initial step must be to determine your risk appetite — or the extent of investment risk you can be able to handle. You might just be comfortable traversing the market’s highs and lows; or you could be overwhelmed of the uncertainties that go along with aggressive investment strategies. Knowing these three things will help you in determining your risk appetite.
1. The amount of investment risk you can take
Achieving financial growth entails having financial and emotional risk tolerance. This is to avoid getting stressed and acting impulsively when the value of your portfolio goes up and down.
It may not be an ideal move to pull your money out right away when you see even just a slight market fluctuation because eventually, you might end up losing money. If you have less or zero tolerance to market fluctuations, consider building an investment portfolio with less risk.
2. Your goals and time frame
Your goals and timelines will help you determine your investing options. The higher your goal in terms of the income or assets you want to invest, the greater the return rate needed to beat inflation and achieve your goal. Taking zero volatility risk could make your goals not viable to achieve, and conversely, taking too much risk might cause you to lose your investment.
Short-term goals (below 5 years) like a house deposit or a car, are ideally saved for in cash. With short-term goals, your risk appetite for volatility would usually be low. You don’t wish to be anxious about the financial market condition when you want your money to be readily available. On the other hand, cash savings have the risk of not being able to keep up with increasing prices or the inflation risk.
With long-term goals, putting your money into investments with a better chance of providing inflation-beating returns is more common, ex. shares, but it has the risk of prices dropping. An extended time frame provides more time for your investment to recover when it drops in value. Having a long-term goal requires you to be prepared to deal with volatility risk to get higher returns.
3. Your risk attitude
Risk attitude is personal and is mostly influenced by an investor’s past experiences or current scenarios. When stock markets are growing, you are inclined to be comfortable with the risks in the market, but when it’s dropping, you don’t. Majority of people do not like the idea of losing their money. However, you might regret our decision if you’ve been too cautious and your long-term investment don’t yield the results you want. You can take risks in line with your appetite for risk by dividing your money across various investment types.