Are You Aversive to Risk in the Stock Market?

The aversion to risk is one of the biggest reason why many people are hesitant to invest in stocks.

Just the other day, in my conversation with a friend, I made the suggestion to invest some of her savings in the stock market. Her response to this was that “stocks are too risky”.

In personal finance along with life in general, there will always be a degree of risk. This is no different when it comes to investing.

Although there is always the option to invest in Guaranteed Investments offered by the banks, these investments would yield a very low premium. In the stock market, the sky is the limit.

But how much risk should you take?

The answer to this question is not that clear cut. It would vary from person to person. Some people are more comfortable in taking more risks. Others may be more conservative.

You may have probably heard the phrase “the bigger the risk, the bigger the reward.”

Although there is some truth to this, taking bigger risks could also backfire. The best way to approach stock investing is to always make an informed decision by doing your own research.

Try not to jump onto the bandwagon when selecting stocks. I’ve done that a few times myself and they rarely turn out to be good investments.

There are always going to be so called “experts” from T.V or on the web who will make stock recommendations based on risks. From personal experience, I have found that these recommendations tend to be more noise than notable.

Analysts have suggested that the optimal degree of risk to take should be proportionate to the age. It is recommended that as you age, your portfolio should start to get more conservative.

As I can see why this can be the case, I find it extremely irrelevant. The decision to adopt a more conservative portfolio should depend on how much someone is willing to risk, portfolio size and expected returns, not the age.

The risk in personal finance

Unless you were born wealthy, taking risk is unavoidable for those interested in financial freedom.

The reason why many people are stuck in the rat race is because they are unwilling to step out of their comfort zone. Living a comfortable and content lifestyle will provide security but it would also give the reason of not wanting to improve or change.

This is why I believe that a stable and secure job could be an obstacle on the path to financial success.

I am not saying that everyone should quit their day job to start their own business but for most, it would be extremely difficult to become wealthy if they get stuck as an employee.

Risk tolerance training

This may sound silly but I like to keep challenging myself to stay out of my comfort zone by testing my tolerance for risk.

From time to time, I would like to participate in something I call risk tolerance training.

I do this by putting myself in situations where I can get more comfortable in making bigger purchases. It is important to not become outcome dependent in this as that would defeat the purpose of the training.

This practice will help me develop the right mindset when it comes to dealing with larger digits. When opportunities that are outside of the usual amount that I am used to presents itself, I will be ready capitalize.

Something to look into if you would like to start taking more risks.

Do you see risk taking as a crucial element to financial freedom? Do let me know in the comments.