Your Risk Appetite Determines What You Should Do

It is critical to know early in your life, what your risk appetite is like. How much financial risk can you digest without a meltdown? And as we get older, it is wiser to take less risk and adjust our activities. In gambling and investing, there is always risk. But the key difference is that investing is calculated risk with higher elements of control than gambling, which for all intents, is pretty much pure luck with the odds stacked against you always.

If you want to start a business, be prepared to live in a risk pressure cooker. Some businesses, especially when they are small start ups, have lower financial risk at the onset, but eventually as your business grows, you have to be comfortable making decisions for the flow of thousands to millions of dollars. And be ready to lose it. Not only is there capital risk, but the opportunity cost of your personal earning stable income, from working for someone, is lost too. Not being able to deal with this pressure is something you should consider before you start any investment including stocks and bonds. Why lose sleep worrying about thousands of dollars? This is probably one of the reasons why Bruce Wayne decides to fight crime at night. Imagine the risks he feels everyday for Wayne Corp.

Being aware of your risk appetite doesn’t mean jumping head first into every risky situation. It is all about taking into account the ‘risk-reward ratio’.  There might be the potential to lose $5,000, but if it gives me the potential to earn $50,000 on the upside, 10 times more than my potential loss, it’s probably worth it. This is a common stock strategy employed by traders, and what is a comfortable risk-reward ratio to use is up to individual preference.

The bottom line is, if you go into a venture or investment without any intention to take risks, thus limiting your rewards, then why not just stay in your accounting firm in the first place?