Most investors are familiar with the risk-reward concept, but fail to fully understand what their personal risk level is when it comes to investing. AOG Wealth Management, your experienced wealth management advisor, shares some ways to help you determine the risk preference.
Risk preference is a concept about what a person chooses to do when faced with a risky option vs a more definite or defined option. It can be difficult for investors to determine how much risk they can handle, especially with the variety of investments to choose from. When weighing your options, here are the two factors you should consider:
- Time Horizon – Before choosing an investment, determine the time span you plan to keep money invested. For instance, if you have $10,000 ready for investment today but will be needing it the following year for a down payment, then investing it in higher-risk investments is not the best choice. Consulting investment management experts like AOG Wealth Management can help you determine which investments are best suited to your financial goals and timeframes.
- Amount of Money to Invest – As part of the risk equation, invest only money that you have saved and accrued and in a worst case scenario…if the investment does not work out…it is not a major issue relative to your overall investment strategy. In other words…don’t make big bets when investing.
The Risk Pyramid
Once you have decided how much risk is acceptable by acknowledging both the amount of money to invest and time horizon, use the risk pyramid approach to help balance your assets. This pyramid is a tool that investors can use to spread out their portfolios based on each one’s risk profile. There are three distinct tiers to the pyramid: the base, middle, and the summit.
The foundation represents the strongest option, supporting everything above. The focus is low-risk investments with more consistent returns. As the largest area, it comprises the majority of your assets. The middle portion should consist of medium-risk investments with a stable return that allows capital appreciation. These investments, while riskier than those at the base, are still relatively safe. Lastly, the summit is reserved for higher-risk investments. The smallest area of your pyramid should be made up of the money you can afford to lose without serious repercussions.
These tactics along with proper wealth management strategies are some of the key factors that can help you achieve your financial goals. Call AOG Wealth Management at (866) 993-0203 to learn more about our services.
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