Determine your risk margins

As investors continue to be buffeted by uncertainties in the market, the importance of an appropriate, disciplined and strategic investment plan has become increasingly evident. Emotions are among an investor’s biggest enemies, particularly when facing challenging and unpredictable events.

Discipline and commitment to a long-term financial plan are vital and will eliminate many risks lining the path of any investor.

Every investor seeking return – whether for retirement, further studies, preservation of capital or income generation – should take the time to get to know and understand their risk preference.

Once you fully understand how you view risk, you will know where and how much to invest and what return to expect. It will also enable you to manage your future expectations and expenditure.

In determining your risk preference, you need to carefully consider factors such as investment time horizon, type of investment vehicle, required market participation and future cash flow requirements. The target set by the investor also plays a crucial role.

The target can be set as inflation (wealth preservation), zero (capital preservation) or an absolute/relative value. Investors should consider liquidity, capital preservation and growth in determining their goals.

Finally, risk preference will be influenced by the type of investor they are. Broadly speaking, investors can be divided into those seeking to grow wealth (mostly pre-retirement individuals) and those seeking to preserve wealth (mostly retired).

Maarten Ackerman is a Citadel Investment Strategist and Advisory Partner.

This article was originally posted in The Citadel Investor 2017, and was republished with permission.