How much investment risk can you take?

Investing always involves some level of risk. But while you can’t avoid risk entirely, you can manage it. The key is understanding how much risk you’re comfortable with – based on your financial goals, situation and mindset – so you can make informed investment decisions that align with your needs.

So, how do you determine your own risk tolerance? Let’s break it down.

Understanding the risk-return trade-off

All investments come with risk – it’s simply part of how investing works. But not all investments carry the same level of risk. Generally, higher-risk investments offer the potential for greater long-term returns, while lower-risk investments tend to be more stable but provide lower returns over time.

As an investor, unless you plan to access your money in the next few years, it’s important to:

Keep a long-term perspective – Markets rise and fall, but history has shown they tend to recover and grow over time. Those who stay invested through the ups and downs are often rewarded in the long run.
Manage short-term volatility through diversification – Spreading the risk across different asset types, industries and regions can help reduce risk and smooth out returns over time.

And if you ever come across an investment that claims to offer high returns with little to no risk? That’s a major red flag. If something sounds too good to be true, it probably is – so get in touch. We can help you assess whether an opportunity is legitimate.

How much risk is too much?

Your risk tolerance is unique to you, and a successful investment strategy balances two key factors:

Attitude to risk (how you feel about risk)

Some people are natural risk-takers, while others prefer financial security. Your attitude to risk reflects how you emotionally handle market swings. Would a sudden drop in your portfolio keep you up at night, or would you see it as a long-term opportunity? Your mindset plays a big role in shaping your investment approach. Also, your understanding of the assets you are invested in can help you understand risk. In fact, when investors become unstuck, it is usually because they did not understand what they were invested in.

Capacity for risk (how much risk you can afford to take)

While you may feel comfortable with risk, what can you realistically afford? Your capacity for risk depends on your goals, income and savings, and how long you plan to invest. For example, a retiree relying on their investments for income has a much lower risk capacity than a young professional with decades to recover from market downturns (unless saving for deposit on a home purchase).

A closer look at your risk tolerance

Your risk tolerance is shaped by multiple factors. Take a moment to reflect on these key areas:

Emotional response to market volatility – If markets take a dip, would you panic and sell, or would you stay the course? Investing isn’t just about the numbers, but also your ability to stay calm and enjoy the journey. A well-structured investment strategy should give you confidence, not stress.
Time horizon – The longer your investment timeframe, the more risk you can generally afford to take. If you’ll need the money in the short term, reducing the risk level in your portfolio may be a good option.
Investment goals – Are you investing for retirement, a house deposit or something else? Once again, longer-term goals can typically withstand more risk, while shorter-term goals may require a more conservative approach.
Financial situation – Do you have savings or other income sources? Your overall financial picture will influence how much risk you can comfortably take on.

How we can help you make sense of it all

Understanding your risk tolerance is one thing – applying it to real investment decisions is another. But you don’t have to figure it out alone. That’s where an Invest Link adviser comes in.

We can:

Assess your personal risk profile and explain how it impacts your investment choices.
Help you build a diversified portfolio that matches your risk tolerance and financial goals.
Guide you through market volatility to prevent impulsive decisions that could hurt your long-term returns.

Remember, investing without knowing your risk tolerance is like setting out on a road trip without checking your fuel tank – you might be fine, or you might run out of petrol when you need it most.

Want to understand your risk tolerance and build an investment strategy that suits you? Get in touch today – we’re here to help.

Disclaimer: The information provided in this article is intended for general informational purposes only and does not constitute financial advice. Every individual’s financial situation is unique, and financial decisions should be made based on your specific circumstances and goals. We recommend consulting with a qualified financial adviser before making any investment, insurance, or mortgage-related decisions. Mortgage Link, Insurance Link, Invest Link, and FG Link are part of the Link Financial Group, offering tailored advice and services to help you achieve your financial goals.