Attitude to Risk
Stock trading always implies a certain extent of risk, i.e. probability to lose an investment. An attitude to risk, also known as a risk profile, refers to the readiness of an investor to accept risk. It typically depends on the timing and investment goals.
What Is Attitude to Risk?
It is the degree of risk that an investor is prepared to take with their money and assets within a specific timeframe. Some investors deposit their money because they are not ready to accept losses in stocks. And someone buys stocks because they believe that a more "dangerous" investment will be more profitable.
To make the right decisions on the market and become a successful investor, you need to understand your attitude to risk. This understanding can help you correctly determine which part of the portfolio to invest in risky instruments, and which one - in "safe" instruments.
For long-term investments, it is better not to deposit all of the funds. In the long term, the deposit will grow slower than inflation, and your investment will lose in value. In this case, it is better to invest in stocks.
For short-term investments, it is better either to deposit the money for a short term or buy a currency. This is because it is almost impossible to predict the movement of the stock market for a short term period, such as 6 months. If you invest in stocks or ETFs, you may lose some of your investment and you will not have time to recover.
The risk profile exists not only among private investors. Asset management funds also need to determine the level of risk that they are prepared to accept and build their strategy on this basis.
Attitude to Risk Examples
Let's consider two examples of investors that illustrate high and low-risk profiles.
Investor A: invests for the long term, current investment income is not obligatory. They want investments to be safe but are looking for an annual profit of 10-15%. They are not ready for drawdowns of more than 5-10% and may take some time to figure out the instruments. Such an investor can make a portfolio of bonds and invest a small part (10-20%) in an ETF.
Investor B: wants to receive current income from investments, but may need the money at any time. Ready for drawdowns, but not more than 20% of the portfolio. Ready to invest a lot of time. Such an investor can make a portfolio of dividend stocks that will pay income 1-2 times a year. They can leave part of the money in cash in the case of a sale on the market.
It is important that you always stick with the attitude to risk that you initially chose. Failing to do so may result in taking either too much or too little risk. In the first case, you may lose your investments, whereas in the second case, you may yield less profit than you expected.