YOUR FINANCE ED.

MAKE FINANCIAL LITERACY YOUR PRIORITY.

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The R factor.

Carried on by Lucrative Returns.

Risk will take care of that.

Research shows that people tend to weigh negative information more heavily than positive information, a psychological phenomenon known as ‘negativity bias.’ It’s amusing, isn’t it? We often talk about optimism, and staying positive, yet we tend to fixate on negative news rather than the positive stories in the newspaper. Most of us can agree that this is indeed the case. So here’s a question: why is it that when we talk about stocks or investments, we get so carried away by the promise of lucrative returns that we often fail to see the risks involved in the process?
I must acknowledge that some people do pay attention to risk, but they sometimes focus so much on it that they decide not to invest at all. Instead, they choose to keep their cash in the locker or a savings account, settling for the low interest offered. Then there’s another group of people who take calculated steps to research both risk and return before making their investment decisions. Which group do you want to find your place in? What kind of risk-taker are you? Let’s find out.

Investors are broadly classified into the following types based on their risk tolerance:

Aggressive:These individuals are the ‘Go big or go home’ types. They are willing to take significant risks and, if all goes well, enjoy superior returns. However, when things go south, they might end up losing all they’ve invested. Aggressive investors are well-versed in the market and don’t panic and sell when the market is down, as they are accustomed to fluctuations. Their preferred asset class is equities.

Moderate:Moderate-risk investors strike a balance. They maintain a diversified portfolio with a mix of risky and safe asset classes. They calculate the percentage of loss they can tolerate and invest accordingly. As a result, their returns are not as high as those of aggressive investors, and they may still experience significant losses during market downturns. Moderate risk tolerance typically leads to moderate returns.

Conservative:For conservative investors, avoiding losses takes precedence over making profits. They take the least risk and prefer safer investment options. Conservative investors are comfortable with fixed deposits (FDs), the Public Provident Fund (PPF), where the principal or capital is safe.

So, what kind of risk-taker are you? There’s nothing wrong with seeking lucrative returns, but it’s equally important to understand the associated risks. When you have a clear understanding of both risk and return, you can potentially achieve fantastic returns on your investments and remain unfazed by short-term fluctuations. Remember, it’s crucial to ‘know before you invest.

-by Jayapratha Kannan.

 

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