A guide to understanding risk management

Every day we are constantly managing risk; whether we are conscious about it or not. Usually, when we speak about risk, the first thought that comes to mind is about managing money and investments, but we also manage risks engaging in simple tasks such as driving a car or even crossing the street.

As these tasks are repetitive and have become routine in our daily schedule, we manage them unconsciously. This, however, is not the same when it comes to investing in financial products. With respect to any type of investment, whether it be stocks, commodities or real estate, we need to be aware and conscious of what we are willing to lose to achieve a goal; the amount lost should not put us in a detrimental financial position. Therefore, when it comes to investing, everyone has a different tolerance to risk.

So, what is risk tolerance? Risk tolerance is your ability and willingness to endure a loss within your investment portfolio/s. It is a measure of how much you can afford to lose in any type of investment decision. We’ve all heard the warnings of risks, but how do we know what exactly is our tolerance? To better understand your own tolerance, you can use our Investment Risk Calculator. What I can say is that in any type of risk assessment, honesty is definitely the best policy—you must ensure that your answers to the questions accurately reflect your true tolerance for risk.

While understanding your risk tolerance is important, we also need to understand what we want to achieve by taking on this risk. You might want to ask yourself what you’re saving for, how long do you want to keep the investment for or when do you want to withdraw the some or all of the money, and how long do you want the investment to last after withdrawal.

Is it goals like saving for your children’s college fund, for retirement, a vacation, or even building wealth in general? Completely understanding your financial goals can help you determine how long it will take to compound your money, and thus how risky an investment you can choose. Generally, the longer your investment time-line, the more risk you can assume because you have more time to recover if you incur a loss.

Smart investors consider both risk and return. Investments with higher expected returns and higher volatility, like stocks, tend to be riskier, but a more conservative portfolio like bonds is a less volatile investment. However, all types of investment portfolios can experience short-term losses due to fluctuations in market conditions. Therefore, it's important to have a diversified portfolio that includes a wide variety of investment options.

All in all, how much investment risk you are able to take on is determined by your individual financial situation and financial goals. While we may aspire to travelling the world, purchasing the newest car model, sending our children to the best universities or retiring early and comfortably, we can achieve this through investment. At Republic Wealth Management Limited, we have a range of investment products and services which will suit your specific needs: Mutual funds, Private Wealth Management Services, Retirement Planning, and Brokerage Services– local and international. These are designed to tailor a portfolio that meets your investment goals. You can learn more about how to protect and grow your wealth through the products and services we offer.