Successful investing is about managing risk, not avoiding it.
It is a word that discourages most people from investing their money. What if I don’t make a profit? What if I lose more than I make? What if I cannot even recover my capital? These are the fears that come to one’s mind when one thinks about investing and that too specifically in stock markets. And trust me these fears are natural.
Every person wants to avoid risk especially when their money is involved and to keep their money safe people invest it in low-risk options such as bank FDs, PPF accounts, etc. but they have to settle for lower returns. Another drawback is that they may also lose out on many opportunities that would have given them a significant growth of their money. It is a well-known fact that risks are directly proportionate to the returns, i.e., higher the risk higher the returns and vice-versa.
Your focus should be on managing risks rather than avoiding them if you want to make money. And this skill can be learned easily if you start investing at an early age. Starting early is very beneficial as by the time you grow older you learn to manage risk and not be afraid of it. It is okay to lose some money in the initial stages as long as you are learning.
Now let’s talk about how you should factor in your risk tolerance and then build your portfolio accordingly. Risk tolerance means how much risk you can afford to take in your financial planning. This risk tolerance will help you determine how to allocate assets in your portfolio. You can either have a high, moderate, or a low-risk tolerance. If you are young and have a stable income you can afford to invest in high risk, high return options (e.g. equity) whereas if you are older and planning for retirement you should put your money in low-risk options (e.g. PPF, bonds).
Hope that you got to learn about risk and will now be taking better decisions to manage it rather than avoiding it.