Investment risk is necessary in order to grow returns. Failure to take on risk means low—or even no—returns and little growth. However, many investors rightly fear having too much risk and being too aggressive with their investments. How can you know when it's okay to ramp up your personal risk levels? Here are five indicators:
1. When You Have Time
The farther away you are from when you need to use the funds, the more aggressive you can be. Those in the early years of saving for retirement, for instance, can often take on more risk than those close to retirement. The reason is that they have more time to smooth out any losses and are less likely to have to take out money at a loss.
2. When Your Portfolio Is Balanced
Risk tolerance isn't measured in terms of individual stocks or investments. Rather, it should be considered in terms of your overall portfolio. Assess the balance of risk in your investment portfolio as well as your personal wealth management strategy. When you have a healthy mix of risk levels, you may feel confident raising the risk of certain investments.
3. When You Know the Investment
One good rule of thumb is to avoid taking on unnecessary risks when you don't fully understand what you're investing in. If you're not sure how cryptocurrency works, how can you make informed decisions about how to invest in it or what risk level is smart? The same could be reasoned about risky business ventures, startups, or specific categories of investments.
4. When You Have Set Limits
Being the master of your investments doesn't mean never taking chances or rolling the dice, so to speak. It just means setting personal guardrails to prevent areas of higher risk from getting out of hand. Set limits about how much you invest in a higher-risk category, how long you will invest in it, or what triggers will cause you to stop.
5. When You Can Afford to Lose
Just as a gambler would never want to gamble with their rent money, an investor shouldn't amp up risk with money they can't afford to lose. This is most often applied to retirement savings, but it also may include things like your children's college funds or money you've borrowed at a higher rate. Want a better return on your vacation fund? This may be something you can afford to lose.
Where to Learn More
Start choosing where and when you boost the risk levels in your portfolio by meeting with an experienced wealth management planner in your state. They will work with you to assess your goals, your financial state, and your opportunities to find the right mix for you.
For more information, contact a wealth management planning service.