An unfortunate truth about investing is that we can’t earn decent investment returns without taking on risk. On the one end of the risk spectrum, we could leave our money in a bank account earning less than 1% interest a year. Not much risk here, but no returns either
At the more extreme end of the risk scale is spinning a roulette wheel at the local casino. The risks are huge—meaning the chance of losing our initial ‘investment’ is very high—but so are the potential rewards if luck happens to go our way.
Investor risk profiles
Investors have different risk profiles depending on things like:
How much spare change they can afford to lose.
How close they are to retirement.
Whether they have a steady job or business that generates enough cash each month to pay their living expenses.
Those with more years of investing left ahead of them may wish to take on more investment risk because they have more time to recover if things go wrong. These investors might allocate more of their portfolios to riskier investments such as cryptocurrencies, startup companies and growth stocks.
Those who are lucky enough to have already retired, however, may want to live on a steady income stream from the investments they have already accumulated. Their biggest risk is losing their retirement savings—meaning they are typically more inclined to play it safe. These types of investors often allocate more of their portfolios to interest paying bonds and stable dividend paying stocks.