Buy Low, Sell High

Navigating the world of investing? It’s not just about picking stocks and watching them grow – it’s also about knowing how much risk you’re comfortable with. This is what we call risk tolerance. It’s a fancy term, but it’s really just about how you feel when the value of your investments goes up and down. 

Think of risk tolerance like your investment personality. Some people are thrill-seekers, loving the highs and lows of the stock market. Others prefer a smoother ride, with less drama and more predictability. Knowing which type you are helps you build an investment portfolio that feels right for you.

Why is this important? Well, if you’re the kind of person who gets nervous when the market dips, you might not want a portfolio that’s full of volatile assets over the short term. On the other hand, if you’re okay with some ups and downs and have time on your side, you might lean towards these very assets that promise the potential of higher returns over the long-term. 

Let’s break it down: 

  • Aggressive Investors: These are the daredevils. They’re okay with big risks because they’re aiming for big rewards. Their portfolios are usually heavy on stocks. Younger folks often fit here because they have more time to bounce back from bear markets and crashes.
  • Moderate Investors: These investors are the middle ground. They like a mix of stocks for growth and bonds for stability. It’s like having both a sports car and a family sedan in your garage.
  • Conservative Investors: Safety first is their motto. They stick to investments like bonds and cash that don’t jump around too much in value. This is often the go-to for people closer to retirement or those who just don’t like too much risk.

“A price drop is not an actual risk. The actual risk is not to know the reason why the price was dropped.” ― Naved Abdali

Your risk tolerance can change over time. In your 20s, you might be all about taking risks. But as you get older, you might start to prefer a safer approach, especially as retirement gets closer and you don’t have as much time to recover from market dips.

So how do you figure out your risk tolerance? It’s a mix of your:

  1. Emotions: How do you react when the market goes down? If it makes you super anxious, you might be more risk averse.
  2. Goals: Saving for a vacation next year? Maybe don’t go too risky. Planning for a retirement that’s decades away? You might afford to take more chances.
  3. Age: Generally, younger people can handle more risk because they have more time to recover from any losses.
  4. Investment Size: Sometimes, having a bigger portfolio means you can take more risks. But this isn’t always the case.

If you’re still unsure, there are quizzes and tools online that can help you figure out your risk tolerance. Or better yet, chat with an investment manager who can help you understand what it all means for you.

Knowing your risk tolerance is key to building a portfolio that works for you. If you’re risk-tolerant, you might see bigger ups and downs in your investments, but potentially bigger returns too. If you’re risk-averse, your returns might be smaller, but you’ll probably sleep better at night knowing your investments are more stable.

At the end of the day, understanding your risk tolerance helps you make investment choices that you’re comfortable with and that will help you reach your financial goals. And remember, it’s always okay to change your strategy as your life and goals evolve.

“The problem is that real risk and perceived risk are two different things. And that’s where people get into trouble because they perceive risk to be high when prices are low, and they perceive risk to be low when prices are high.” ― Bill Miller

At Luthuli Capital, we specialize in crafting investment portfolios that resonate with your unique risk profile. Schedule a consultation today and we’ll help you construct and navigate your investment path with confidence and clarity.

Scroll to Top