How Much Risk Should You Take When Investing?

If you want to dramatically increase your wealth, experts will tell you that you shouldn’t save.

They’ll tell you to invest!

By putting your money into an investment vehicle such as a tax-free savings account, registered retirement savings plan, or non-registered account, you’ll have to select the actual fund or funds you’d like your money to be in.

But when it comes to investing, how do we know how much risk to take when it comes to putting our money into the market so it can work for us?

There are approximately five levels of risk to investing. Conservative funds are usually a safe choice, while an aggressive fund comes with a chance to make more money but also a chance to lose more money.

The first thing you should ask yourself is what the money is meant for.

Are you planning to use it in case of an emergency? Do you want to start saving money for when you retire and are no longer drawing an income?

Determining what your money will be used for is the first step to deciding how much risk you should take. If you need that money for a worst-case scenario situation, it’s not wise to take on a lot of risk in case your investment drops when you need the money. You may have less than you hoped.

Conversely, if you’re saving money for retirement and aren’t retiring for more than 10 years, you could take on more risk with the notion that if your investment did fall, there would be ample time to recover.

The next question to ask yourself is when will you be using this money. Are you saving for a trip next year? Do you have 30 working years left before you plan on touching your investment?

The length of time until you will be using your investment matters when determining how much risk to take. The shorter the time until you plan to use your money will lower the amount of risk you should take. More time equals the opportunity for more risk.

You’ll also want to determine how many different investments you have. If you have multiple accounts invested in the market, a great idea would be to diversify your money by spreading it over varying risks.

If you put each investment you own in the same funds, when those funds drop — which they definitely will at some point of the life of your investments — the value of your investment will drop. By putting your money into diversified funds, when some accounts go down, others might go up or, at least, not fall as dramatically as some of your other accounts.

And the final question to ask yourself is what you’re comfortable with.

You might have years to save, meaning theoretically you could take on more risk, but if that causes you anxiety or makes you nervous, there is nothing wrong with taking on a lower risk fund or funds. Go with your comfort level.


Source - winnipeg free press