Investing in shares shows a persons risk appetite. There is no specific formula to define the quantity of risk taken. But there are some factors that influence the investor. If the investor is riding his luck and getting high returns on high risk stocks he will invest all his assets and no one can prevent him from doing so. At the same time a person who has invested and lost a fortune during the downslide will be more comfortable with a low yielding fixed deposit in a nationalised bank.
Risk appetite mainly comprises of factors such as income level, ones ability to handle stress, previous experience, percentage of money invested compared to wealth, social factors, age and dependants, health factor and finally personality. These unquantifiable factors which vary in uncorrelated manner make it difficult to estimate ones risk appetite.
Risk profile which is totally different from risk appetite can be estimated with high accuracy. The preferred rule of thumb is cent percent of your savings should be in equity. To be on the safer side it can be 80% making a provision of 20% for other expenses in the future. If you have pension then percentage for investment can still be increased.
Since risk profile can give you a percentage exposure to high, medium and low risk asset classes but does not take into account your risk appetite, the best way to arrive at a personal asset allocation is to ascertain one’s risk profile and then increase or decrease it based on personal preferences.
The most important part about determining one’s risk profile is investing according to it, re-balancing to keep within the boundaries and above all resolving not to get distracted by the outside world.
Investing in shares shows a persons risk appetite. There is no specific formula to define the quantity of risk taken. But there are some factors that influence the investor. If the investor is riding his luck and getting high returns on high risk stocks he will invest all his assets and no one can prevent him from doing so. At the same time a person who has invested and lost a fortune during the downslide will be more comfortable with a low yielding fixed deposit in a nationalised bank.