Risk appetite


Your appetite to risk will determine the investment decisions you make. The more risk you are comfortable with, the riskier investments you might consider. Higher risk investments typically offer greater rewards, but high-risk means you are more likely to lose your investment capital.

What is Risk Appetite?

Risk appetite defines the types of investments someone chooses. Investors with a higher risk appetite are more likely to invest in high-risk, high-reward opportunities such as stocks and commodities, while those with a lower risk appetite may prefer safer investments such as bonds or real estate. Other factors, such as market trends and political instability also affect risk appetite. Ultimately, understanding your risk appetite is essential in making informed investment decisions that align with your financial goals and priorities.

What are the different levels?

Investors must decide how much risk they are comfortable with. Risk is split into the following categories:

  • Risk neutral. Investors with a neutral risk appetite are willing to take risks, but it has to be balanced by reward ratios or be central to their overall goals. If it doesn’t fit this formula, they skip the investment and move on. 
  • Low-risk. These investors are risk averse, which means they’re unwilling to take any additional risks to meet their goals.  
  • High-risk. These types of investors are willing to do whatever it takes to achieve their goals, and they understand the risks and readily accept them – this is a double-edged sword. 

What are the benefits and drawbacks of having a high vs. low risk appetite in investing?

No matter what your level of risk is, you can come up with an investment strategy that will bring in a profit, but there are some key benefits and drawbacks to each. People with a high-risk tolerance are more likely to bring in big profits all at once, but they’re also likely to lose large sums in single trades. Additionally, they can access more expensive investments, allowing them to reach their goals quickly. 

Low-risk investors are okay with taking it steady to avoid the risk. For example, they will suffer fewer losses during their investment journey, but it will take them years to reach the finish line. In most cases, cash is tied up for longer if an investor has a low risk tolerance, which reduces their overall liquidity

Even though each option has its own benefits and drawbacks, it doesn’t make one or the other good or bad. For example, an investor will only see a long-holding/low-risk strategy as a drawback if their goals are much more short-term. 

What are the key factors to consider when assessing an individual’s risk appetite?

Even though risk appetite is different for everyone, there are a number of common elements that you can consider along the way including:

  • Financial stability. People with wealth on their side and plenty of disposable cash will most likely have a higher risk tolerance, as suffering losses won’t mean as much to them. 
  • Investing goals. Long-term investors are often low-risk because they have the time to hold positions and wait for the bull run. Short-term goals bring high risk, as investors are influenced by the deadline. 
  • Age. Young investors are more likely to take risks because they’ve got the time to recuperate the losses. OIder investors don’t have that luxury, so they’re less willing to risk their existing assets. 

Investing will always carry an element of risk, but not everyone will have the same appetite to walk on the riskier side. A person’s risk appetite is typically determined by their goals, financial stability, and their age.