For some investors, risk may mean uncertainty, while for some others it may mean an opportunity to grow. Either way, we are concerned about the returns an investment can generate and looking at ‘returns’ through the filter of ‘risk’ is advisable for investors.
Excerpts from the book ‘The intelligent investor‘ by Benjamin Graham can guide us through the process of identifying the amount of risk we can take.
” It is widely believed that the return you can expect from an investment is directly proportional to the risk that you are willing to take. This basically translates into the belief that high risk equals high return while low risk equals low return. However, the rate of return that an investor can expect is not only a function of risk but also of the amount of effort he/she is willing to invest in research (gaining knowledge and understanding the investment instrument).
You need to ask yourselves few questions that helps to determine your risk taking limit –
Are you single or married? What does your spouse or partner do for a living? Do you or will you have children? When will the tuition bills hit home? Will you inherit money, or will you end up financially responsible for aging, ailing parents? What factors might hurt your career? (e.g. If you work for a chemical manufacturer, soaring oil prices could be bad news.) If you are self-employed, how long do businesses similar to yours tend to survive? Do you need your investments to supplement your cash income? (In general, bonds will; stocks won’t.) Given your salary and your spending needs, how much money can you afford to lose on your investments?”