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Should you change how much risk you take as you grow older?

Many would say, as you get older the amount of investment risk you should take goes down. This assertion is made without others knowing anything about you, we explain risk a bit more and what people mean by this statement.

You should think about risk in two different ways;

  1. Ability to take risk

  2. Tolerance to take risk

Ability to take risk

Your ability to take risk is the reality, you may want to be super ambitious and think you are happy to put all your life savings on one single stock however the reality may be far from that.

You may have lots of debts, overheads. Your life savings are there for you to use towards your future or buy a house. In this case, your ability to take risk isn’t as high as you think.

Tolerance to take risk

You tolerance to take risk is more to do with how much loss can you actually bear. For example say you completely lost your savings would you be ok with that or will that drive you towards becoming depressed.

Some people are more cautious than others, to some even lost $10 is frustrating and they would rather not take the risk of investing if they will end up in that position.

Which of the two is important?

Your ability to take risk is always more important. The greater the risk the higher the potential return but also the higher the loss. It is important that no matter what investment decision you make, you carefully balance those factors. This isn’t to say don’t invest at all but investment truly is about carefully calculated risks.

Should you really take less risk as you get older?

Well, it really does depend on you and what kind of person you are as well as your circumstances. Generally it is true, the older you get the more cautious you may become but more importantly you have less time to recover any losses. Say for example you invested and the market crashed, you have two options sell at a loss or hold on. Depending on the type of investment the market does rebound and so instead of crystalising your losses you may prefer to hold on.

You may get lucky and the company you invested in recovers rather than closes. For example, take COVID and the hospitality sector. With lockdown everything came to a standstill, no one was going to restaurants anymore. Some restaurant may have closed down after having carefully assessed their position and may have thought that they are unable to operate in the next couple of years.

This isn’t to say that the hospitality industry will never get back to how it was. It may take time but it may become a thriving industry again. Assuming you invested in a restaurant which weathered the storm then you may find that in a couple of years it eventually picks up. However, equally don’t forget selling out may have been the better option especially if the restaurant closes down. There isnt a right or wrong decision.

Whether you take less risk as you get older is purely down to your circumstances and your reasons for why you invested.

Where should I start?

Start by looking at both your ability and tolerance for risk. There is a misconception that those that take risk are “cooler” or better where as those that are cautious are weak. This is not at all true when it comes to investment. Those that take carefully calculated risks are the smart ones and that is what you need to figure out. Don’t completely not take any risks and don’t put yourself out there to the point that if you did lose, you would lose everything. Balance your ability and tolerance, figure out how long you are investing for and whether you can hold on long enough to recoup the losses.

Disclaimer: The above article is not intended to be advice, past performance is not an indication of future performance.

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