Investing basics
What is the Risk Ability and Willingness/Tolerance in Investing?
Risk Willingness/Tolerance and Risk Ability:
Investments should be made logically, with an attempt to minimise risk while meeting your long term financial goals. Whenever there is uncertainty of what the outcome will be, there is a risk. People react to risks or uncertainty differently. And, it has a big impact on how they invest, and hence, on actual returns earned. Risk Willingness or Risk Tolerance is the degree of uncertainty that you can withstand, without losing sleep. It is highly situational, difficult to measure accurately, and it changes over time. Often, investors may feel and profess that they are willing to take risks. But, a sudden drop in the market makes them panic and sell out at unfavourable prices.
Risk Ability or the answer to ‘Can I afford to take risks?’, is the capacity to bear risk or sustain losses without a significant impact on your lifestyle. It is high when you have time (years) on your side (to wait for the returns to happen) for both compounding to work and to wait through market corrections, even if it takes a few years. It’s precisely this reason that we insist you look at your Investable Surplus, the money you don’t need for a long time.
Risk Willingness and Risk Ability are influenced by a person’s age and stage of life.
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