Acquired Taste: Knowing your Investment Risk Appetite

Investing can be quite daunting for anyone, especially for someone who has no or limited knowledge about the market and how it works. There are so many things to know, remember, and consider.

If and when you do decide to invest, the first thing you should ask yourself is how much investment risk— or the probability losses would occur relative to the expected return on any particular investment— can you take?

Roll with the punches

There is no such thing as a 100% risk- proof investment. Anyone who would claim otherwise is most probably a con artist. The reality is every investment instrument comes with its own level of uncertainty. Losses are part of an investor’s life.

Market conditions, inflation, interest rates, domestic political issues, economic and political uncertainties overseas, and corporate earnings are some of the factors that can affect the potential returns of an investment. Diversifying your portfolio by investing in different asset classes can reduce overall investment risk by not being hamstrung by a poor performance of a single security or industry. However, this would entail a substantial investment capital and may not be a viable option for first- time investors.

Eyes on the prize

After determining how much risk you can stomach, the next thing you should ask yourself is what your investment goal is. Basically, what are you trying to accomplish?

Financial advisors often ask their clients what their end- goal is when investing. Preparing for their retirement? Financing their child’s college education? Funding a future business venture? Or is it simply to take advantage of upbeat market conditions?

Before taking the plunge, study first the nittygritty of each investment instrument before putting one’s hard- earned money in it. Each instrument has its own characteristics. Again, for best results, try to invest in as many asset classes as you can whenever possible to mitigate risks.

You want it when?

Your intended investment goal also coincides with your investment timeline.

For instance, as you near the age of 60, your tolerance for risk will likely decrease. You will have less time to recover any incurred losses and, thus, might have to settle for low- risk, low return investments like bonds and treasury bills for your retirement money. These investments are less susceptible to wild fluctuations in market prices compared to equities. Corporate bonds with a five- year maturity might be the way to go for you.

Relax, think it over

In the event of a loss, the main thing is not to act on impulse. The situation must be handled with logic, discipline, and a clear mind. Reacting negatively at the slightest market fluctuations by pulling out your money from an investment may not be a good idea in the long run.

Sometimes it’s better to simply let the market right itself over time. In extreme situations, it might be wise to cut your losses altogether and pull out all your funds. Whatever the case may be, it is best to act rationally and analyze the situation first, and if possible, ask the opinion of market experts before making your next move. As they say, “don’t sell when you’re angry or sad; don’t buy when you’re ecstatic.” Be even keeled with your investment decisions.

By understanding the degree of investment risks with which you can withstand, making a comprehensive research on your chosen investment instrument and aligning it with your goal, putting a realistic timeline for you to enjoy a return on your investments, and setting aside money from your discretionary funds for investment purposes, you are now ready to make your first venture into the world of investments.

Equities still rule the roost

For most first- time investors, they usually associate investments in general with the equity investments. The instant correlation is understandable, given that the stock market not only gets the most press among all investment instruments, but is also commonly used as a major economic benchmark. Despite its high- risk, high- reward reputation, equity investment is still the most popular investment option in the market. Owning shares in a publicly listed company is relatively affordable and easy, especially with online stock trading now on the uptrend.

For BDO customers who have an online account, buying (and selling) stocks in the Philippine stock market using the BDO Nomura facility is just a few clicks away. You can log- in using your BDO Online Banking User ID and password. For more details about BDO Nomura and how to trade online, visit