What you need to know about risk tolerance

Investing can be confusing, especially for first-time investors. If you’re not careful about the investment you’re making, you could be wasting your time and, more importantly, your hard-earned money.

But what are the things you have to consider when making an investment?

First, you need to know what your risk tolerance is.

What is risk tolerance?

Risk tolerance refers to how much risk you are willing to take when making an investment.

Knowing your risk tolerance level will help you build your investment portfolio better and drive your investment decisions.

Factors that influence risk tolerance

The following factors determine the level of risk an investor can afford to take.

• Timeline. Every investor follows their own time horizon based on their investment plans. Typically, you can take more risks if there is more time involved. If you need X money in a short amount of time, you generally go for a low-risk investment.
• Goals. Each person has a unique financial goal. To achieve this goal, you need to follow a certain investment strategy designed to deliver such returns. Every strategy has its own set of risks that you need to consider.
• Age. Young individuals are generally keener to take risks compared to older investors. This is because younger investors have the time and capability to make more money and weather out market changes.While this is the more common trend, risk tolerance varies regardless of age.
• Comfort level. At the end of the day, each investor handles risks differently. Some investors are more drawn to risks while others tend to veer away from them.

Types of risk tolerance

Risk tolerance is usually classified into three main types based on how much risk an investor can take.

Aggressive

Investors with an aggressive risk tolerance understand the market well and are not afraid of taking huge risks. These types of investors are experienced and familiar with large upward and downward movements in their portfolio. They have a long investment horizon and are willing to stay invested for a long time (at least 5 years).

While some aggressive investors have money to spare, there are some who have small capital to invest. UITFs make investing in aggressive and more sophisticated funds affordable to the retail market.

Moderate

Moderate risk investors are more wary when it comes to making investments compared to aggressive risk investors. They choose the risks they take and typically set a percentage of losses they can handle.

Moderate risk investors earn smaller gains than aggressive risk investors and do not suffer as badly if the market crashes.

Conservative

Conservative risk investors take the least amount of risk among the three types. They invest in options that feel safe and prioritize market stability and investment liquidity over making a considerable amount or higher gains.

Finding out your risk tolerance will help you decide where to invest. They serve as a good starting point for the investments you should look out for. If you still aren’t sure what your risk tolerance is, don’t worry. Before investing (e.g., in UITFs), you will undergo a client suitability assessment at Metrobank in order to determine your risk.

Metrobank has multiple investment products suited for various risk tolerance types. Start investing meaningfully with Metrobank today.