In our last blog post, we looked at the different risk levels of investments - from high-risk investments to low-risk investments.
All levels of investments have their advantages and disadvantages - the key is to determine which level of risk is right for you.
We are all comfortable with different levels of risk in life. For example, you might feel totally comfortable about the idea of going hang-gliding or backpacking solo around South America. Or, you might prefer to stay home and stick to activities with less risk involved.
The same goes for investing.
No one wants to lose money when they make an investment, but some of us are naturally more cautious around risk than others. It’s up to you to determine what you feel comfortable with.
This is known as your “risk appetite” or your “risk tolerance.” It’s a very personal thing and it will depend on a number of factors, including your financial goals, your age, the amount of money you have to invest and more.
In order to achieve financial growth when making investments, you have to have some tolerance for risk.
However, higher risk investments are not for everyone. Understanding your own risk appetite can help you to make better decisions when it comes to your investments.
Risk Tolerance vs Risk Capacity
You might hear the terms “risk tolerance” and “risk capacity” used. They are similar, but they don’t mean exactly the same thing.
Your risk tolerance is the amount of risk you are willing to take on when you are making an investment. It’s the risk level that you feel good about and that will not keep you awake at night worrying about your finances. (You don’t want to get into an investment that will cause you stress, as this will have a negative impact on your quality of life.)
On the other hand, risk capacity is how much investment risk you are able to take on. This is determined by your financial situation. If you don’t have enough capital to invest without putting yourself in dire financial hardship, you don’t have the capacity to make that particular investment.
It’s possible to have the risk capacity for a particular investment, but not the risk tolerance. For example, you have the funds available for the investment, but you are not comfortable taking it on. Or, the opposite could be true - you could feel comfortable with an investment theoretically, but not have the capacity to make it happen.
An ideal investment is one that matches your risk tolerance and your risk capacity.
You should be able to afford the investment and you should feel comfortable and willing to accept the amount of risk it poses.
Risk Appetite Levels
Let’s take a look at the different risk appetite levels and what they might look like.
The motto of the conservative investor is “a bird in the hand is worth two in the bush.” They would much rather have low risk investments with smaller returns than risk a big loss.
Most people are conservative investors when they first start out because they don’t have a lot of knowledge of the market. Some take on more risk as they learn more, while others like to play it safe and stay conservative.
Conservative investors are happy with solid, sensible investments that keep ticking along year after year. They don’t mind if they don’t earn a high amount of interest, as long as they know their capital will be maintained.
A conservative investor likely has long term plans for their money and doesn’t panic if the market fluctuates in the short term. However, they might miss out on the opportunity to earn more, due to their risk averse nature.
An investor with a moderate risk appetite is one who attempts to find a balance within their portfolio between high risk and low risk investments. If you can get this right, it can offer you the best of both worlds.
A moderate investment portfolio can allow you to earn steady, small returns but also have the potential for larger payoffs. Also, when you have a good balance and a very diverse portfolio, you’ll be able to tolerate small fluctuations in the market.
An aggressive investor is someone who is willing to take on a high level of risk. Their motto is “He who dares, wins.”
With this level of risk, there is a chance of a much higher reward. This type of investor is usually very knowledgeable about the market and all the different factors that affect it. They believe that the potential for a higher return outweighs the possible risk of losing money.
When these types of investors get it right, they really win big. However, if they get it wrong and throw everything at a trend that fizzles out, their portfolio can go up in flames. It’s important for aggressive investors to incorporate a few low risk options to balance out their portfolio.
Partbnb: Lower Risk, Higher Return
Investing your money is all about finding the balance that is right for you between risk and reward.
No matter what your personal appetite for risk might be, Partbnb is a smart investment option. We offer you the opportunity to invest in a small fraction of a larger vacation home, so you don’t have to take the risk of buying a full property. The amount you invest is up to you.
Once you’ve owned your fractional property share for at least 6 months, you are free to sell it on the platform and take advantage of any capital gains.
Or, you can hang onto it and enjoy the steady rental income it generates, as a vacation property in a highly desirable Caribbean location. The day to day hassle of rentals is taken care of by a property management company, so you don’t have to worry about it.
It’s an investment option that offers flexibility and low risk, yet steady returns. To learn more about how Partbnb works, visit this page.