Why you should take MORE risk
"Young people aren't taking enough risk." This one comment from Tower's Roger Perry got me thinking recently. And Perry wasn't just meaning Gen Xs. He meant everyone up to the age of about 40 or even 45. In part it's because investors often mistake market volatility for risk. It's also that the same person will need to take different levels of risk at different stages of his or her investing life to maximise the growth retirement investments.
The problem is that too many investors think "low risk good, high risk bad". That's because they can't stomach volatility believing if prices soar that they've "made" money and if they go into freefall they've "lost" money. Of course you've done neither until you sell your investment.
VIDEO:Volatility is not Risk!
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Shares may be volatile, but most don't simply vanish into thin air because of a bit of volatility. They return to their earnings justified price level eventually. Capitalism is resilient, history shows us and boom follows bust like night follows day.
The difference between risk and volatility are even more marked with investment funds. It would be nigh impossible for a properly diversified fund to have every single underlying equity within it crash and burn. So the risk in the very simplest of senses is negligible providing you have long time horizons and time before retirement, which is exactly what the under 40s have. In fact it has been said that the true investor welcomes volatility because volatile, but well chosen investments typically grow at a greater rate over time.
Your need for liquidity may become greater as you age and many investors slowly reduce the proportion of their assets invested in highly volatile investments - although it's important to remember that at age 65 you may have 35 years to live and may need to keep a proportion of growth assets.
Each individual's story is different and everyone should assess their own personal appetite for risk and volatility. Some people, especially the risk averse, simply can't stomach volatility. It turns them into nervous wrecks.
If you don't have a financial planner the MyRiskTolerance.com website is a good place to start. The site's tools are based on psychometric testing and are provided by FinaMetrica - the same company that sells risk profiling tools to Kiwi financial planners.
The results can be an eye-opener. Studies have often shown that men think they have a greater appetite for risk than they do in reality and women are the opposite. Quite often the man says his risk tolerance is average and the wife is a wimp, but it turns out that the wife is the average one and he is right off the scale. He is so overconfident about his abilities that he's willing to risk the family home on some hair-brained investing strategy.
Then there are the people who choose high risk investments thinking that they're in a low risk investment - a la Blue Chip property investments and finance company debentures.
Diana Clement
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