Investing involves risks. It’s important not to take more risk than you can afford, which we call your “risk capacity.”
Imagine two hills: one is steep and rocky but offers a beautiful view, while the other is easier to climb but doesn’t have a great view. You can reach the top of the steep hill in time and are okay with the rough climb. However, if you face any delays, you’ll end up coming down in the dark. Plus, you have to be somewhere afterward and can’t be late. What you’re willing to do is different from what you should do. It’s also like the difference between the risk you’re willing to take and the risk you can afford.
You do not want to take too much risk if you are going to need the money soon
If someone wants to pay for a holiday in a year, they shouldn’t invest the money in a risky way, or they might end up with less than they need. If they’re okay with delaying the holiday if their investments don’t do well, that’s an option. They could also choose to go on a cheaper holiday. In these cases, risking some of the money might be a good idea because if the investments grow, they could afford a better holiday.
You do not want to take too much risk if it is paying for something vital
Taking monthly withdrawals from an investment to pay the mortgage is an example. These withdrawals can’t be changed, and skipping them isn’t smart. If the investment loses value, each withdrawal takes more of the money, and the investment won’t last as long. This could be a big problem. On the other hand, if the money is used for something less important, like non-essential expenses, you can adjust or skip withdrawals more easily.
We evaluate how soon clients will need their money and discuss possible scenarios and their responses. This helps us recommend suitable risk levels. We also help reduce how market drops affect their income, allowing clients to take more risks. These strategies are called withdrawal strategies, and we will explain them in another post.
If you need advice, we’re here to help. Schedule a free, no-obligation chat here. A guide on selecting a financial advisor is also available here.
This blog is for information only and does not constitute personalised investment advice. Past performance is not a reliable indicator of future returns, and the value of investments can fluctuate, falling as well as rising. Tax rules can change and depend on individual circumstances.
