Your personal finance

Personal tolerance for investment risk

 

Whether deserved or undeserved, emotions often play a huge role in the type of investing you do or whether you invest at all. For most people in Malawi, their tolerances for risk begin and end at savings accounts and fixed deposit. The choice of whether to invest in one investment vehicle or another is not determined by concrete knowledge of the performance of the investment vehicle but based on emotions and attitudes.

In investing, like life, there are no guarantees. However, if you take an informed approach to investing, you can take into account actual risks and opportunities. If you refuse to consider any investment other than savings accounts or fixed deposits because you fear you could “lose everything”, you are allowing fear to prevent you from seeing returns on your investments that you could be well equipped to make. Or if you continuously sink all your funds into the investments that promise the highest return with the lowest expenditure, chances are that you are not only losing your shirt more times than you care to recall, but that you are also missing out on investments that can help you achieve your goals.

By now, you are wondering what you can do about your emotional baggage other than go into therapy. While I would never dissuade anyone from pursuing other avenues, once you recognise that you have an issue with risk, there are two basic steps you can take to get your investments on course:

First, become knowledgeable about fundamental investment principles. You are already on your way by getting this far with this column. Knowledge is the most powerful tool you have when it comes to investing, and understanding the basic principles behind investing can prevent you from making costly mistakes based on false perceptions.

Secondly, set specific personal finance growth goals. I have given this topic a considerable amount of space in earlier postings on this column and I cannot over-emphasise its importance. Once you set your goals, you can realistically assess the level of risk appropriate for what you are trying to accomplish in the time you want to accomplish it.

My free advice is for you to remember that your emotional risk tolerance is different from the risk and return analysis that is a fundamental part of any successful investment plan. As a matter of fact, this sort of analysis can help you overcome your emotional mindset about risk because it is based on the actual risks and returns of specific investment vehicles (which we have alluded to already on several occasions on this column) as well as the age and stage of your life when you are making the investment.

Blessed day as you seriously consider of investing. Without taking calculated risks, you will never prosper in life.

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