One of the main questions that people have when choosing to put money into the financial markets is how much cash they should actually invest.
Sadly for us, there's no one-size-fits-all answer to this. It all depends on your own circumstances and how much investment risk you are willing to take on.
Investment risk refers to how much money you are willing to put on the line in return for a potential gain.
The more risk that you take, the higher the potential reward or loss.
Risk is a broad concept and a number of factors will influence how much you want to take on.
If you are investing £10,000 or £10, the first thing you’ll need to take into account is your own financial situation and let it guide you on how much risk you want to take.
Or in simple terms — what can you afford to do?
Probably the most important thing to look at here is how much cash you need to pay any short-term debts or make regular payments, like electricity bills or a mortgage.
For example, if £10,000 represents a tiny fraction of your overall wealth and you have no debts, then you may be able to take on a higher level of risk.
Conversely, if you have £10,000 but are in £50,000 of debt then you will have to consider whether it's worth investing or paying off a chunk of that debt.
Unless you are lucky enough to have an accountant then you are probably the person most familiar with your own finances.
That means you are best positioned to look at your own financial circumstances and figure out what you can and can’t afford to do.
Be realistic about this and use that information to decide how much risk you are happy with.
“I don’t want to worry / about being on time” the great Blink 182 once sung.
Unfortunately, and unlike those San Diego skateboarders, investors do have to worry about time.
Broadly speaking, the longer you are prepared to wait to cash in on your investment, the more risk you can take on.
If you are 25 years old and want to invest £10,000 for when you retire at 65 then you can afford to put that money into riskier assets.
But if you are 25 and are going to need cash in five years time for putting a down payment on a flat — or broom closet if you live in London — you won’t want to take on a lot of risk.
Planning for the future is not always as black and white as this but having a rough idea of how long you can hold on to your investments for is a good way of figuring out the level of risk you should take on.
Everyone invests to make money but every individual will have their own reasons for wanting that extra cash.
It may be that you are investing for your retirement, to beat inflation or to take a high-risk stake in a start-up company.
Your goals will directly influence the level of risk you should take on and the assets that you decide to invest in.
For example, you could have loads of cash and a long term investment horizon but no desire to do anything except beat inflation. If that’s the case then you are unlikely to want to invest in high risk stocks.
Many people do end up making knee jerk decisions, leaping into the stock market and losing money.
As simple as it may seem, knowing what you want to achieve with your money will help you immensely in managing risk and making a decision as to what to invest in.
This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.
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