Home' Trinidad and Tobago Guardian : July 26th 2015 Contents SBG12 PERSONAL FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JULY 26 • 2015
People often use the
terms "savings and
savings is money set
aside for emergencies
or to meet very short-term goals where-
as investment is when money is placed
in financial products with the objective
of earning returns over time.
Another significant difference
between the two is the risk they bear
and the returns they offer. The main
objective of savings should be safety
and ease of access to money. It is there-
fore held in low-risk products such as
bank accounts which generally provide
a lower rate of return.
On the other hand, money invested
in various products like stocks, bonds
and some mutual funds is subject to
fluctuations, where the value of the
money could increase or decrease over
When investing your money how
much risk should you take?
In 2008, when major financial mar-
kets lost more than 30 per cent of their
value, would you have been able to tol-
erate this level of losses on your invest-
Risk tolerance measures how com-
fortably one handles declines in the
value of their investments, both emo-
tionally and financially. Let us consider
the engaging relationship between a
cat, a mouse and cheese. The mouse
will gauge its ability and willingness to
attain the cheese, and then choose the
most appropriate route, considering the
cat s presence.
To make a profit, there are some risks
you would have to accept, as would the
mouse in the pursuit of the cheese. A
major question is how much risk should
Or in the analogy of the mouse,
which route should I take to attain my
objective of the cheese. This question
is best answered by determining your
Risk tolerance as it provides a realistic
understanding of your ability and will-
ingness to tolerate large swings in the
value of your investments.
How to determine risk
There two main components when
determining one s risk tolerance; the
first is your ability to accept risk and
the second is your willingness to accept
Your ability to accept risk would be
determined by factors such as age, the
time you have to achieve the goal and
your net worth. Your willingness to
accept risk would however be driven
by your personality and investment
Consider the following questions:
When do you need the money?
One of the most important compo-
nents of determining your risk tolerance,
is knowing how soon you expect to
need the money you are investing, this
is called your time horizon.
Based on your goal, if you need the
money you have invested in a month s
time, then you want to invest far more
conservatively than if you need the
money in the next 30 years.
Hence you need to pick a portfolio
that fits your needs, it is risky to pick
a heavily stock oriented portfolio if you
will need the money within months.
While there is the likelihood of a growth
in your portfolio over the period, there
is also the likelihood of a loss which
could derail you from meeting your
What is your net worth?
Net worth is simply your assets
minus your liabilities. Risk capital is
money available to invest or trade that
will not affect your lifestyle if lost.
Therefore, an investor with a high net
worth generally has more risk capital
and can assume more risk. It does not
mean that he is willing to accept a high
level of risk but the ability to accept it
Unfortunately, those with little to no
net worth or with limited risk capital
are often drawn to riskier investments
in the hopes of generating higher profits.
If the risk of loss materialises they could
lose everything. It is therefore important
to invest within your risk tolerance.
What are your investment goals?
Your investment objectives must also
be considered when calculating how
much risk can be assumed. If you are
investing for an important goal such
as your child s college education or your
retirement, how much risk do you really
want to take with those funds? Con-
versely, more risk could be taken if you
are using true risk capital to attempt
to earn extra income.
Are you new to investing or are
you proficient in it?
Your level of experience is another
essential factor when understanding
your risk tolerance. A new investor
tends to be very observant and cautious
whilst experienced investors would be
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more comfortable committing
more capital to an investment.
Even if you have the guidance
of an advisor, it s important to
understand exactly what you re
putting your money into as well
as all the risks involved.
What is your attitude to risk?
Your personal tolerance to risk
is a major determinant in shaping
your investment strategy and port-
folio structure. A cautious person
may develop a conservative
approach to investing, hence will
have a lower tolerance to risk and
intuitively a lower expectation of
The opposite would be true of
an entrepreneurial investor who
would have a more speculative,
higher risk investment portfolio.
Knowing your risk tolerance goes
far beyond being able to sleep at
night or stressing over your funds.
It is a process of analysing your
personal financial situation and
balancing it against your goals and
objectives. Ultimately, knowing
your risk tolerance---and keeping
to investments that fit within it---
will enhance your financial well-
Persons with a low-risk toler-
ance should focus on more Fixed
Income investments such as gov-
ernment bonds, treasury bills and
money market mutual funds while
persons with a high-risk tolerance
can invest in a portfolio that is tilt-
ed more towards stocks or mutual
funds which are invested in stocks.
Your personal risk tolerance should
be revisited whenever there is a
change (whether negative or pos-
itive) in any of the factors that
impact your ability or willingness
to accept risk.
Changes can occur as a result
of an inheritance, change in
employment status, marriage or a
new addition to the family.
Tips for couples
As with everyone else, before
creating an investment portfolio,
couples need to set their long- and
Couples face unique challenges,
however, since it may turn out that
each spouse has a different risk
tolerance level, some believe that
the more risk averse spouse should
lead the investing because it s better
to take on too little risk than too
However, a too-conservative
allocation can cause a couple to
miss out on potential gains, there-
fore missing out on opportunities
for investment gains.
Formulating a joint risk tolerance
would therefore guide your invest-
The Unit Trust Corporation
(UTC) has over 30 years' expe-
rience in investment manage-
ment. Our financial advisers could
assist you in determining your
risk tolerance and provide you
with investment advice to
enhance your personal wealth
and financial well-being. Call or
visit us today.
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