Factors Affecting Personal Risk Profile
Risk taking capacity, appetite and tolerance changes depending upon various information and factors.
This can be understood with the help of following points:-
a) Depending upon Personal Information:-
1] Age –
When a person is young, he/she can take more risk as they don’t have much to lose. Also they have a longer time frame available with them to reap profits from their investments even if they suffer some losses along the way. Therefore, lower the age, higher the risk that can be taken.
2] Employability –
When a person has quality education and is skilled and qualified, he/she can find job anywhere. Moreover, these professionals don’t have to worry as their education, skills and qualities will help them earn money in some or the other way. They have a high employability level. Therefore, well qualified and multi-skilled professionals can afford to take more risks.
3] Nature of Job –
A person is stable when he/she has a stable source of income. Having a stable job gives a sense of security. When people have a sense security they can invest more freely. Thus, people with stable jobs can afford to take more risk and can more profits.
4] Psyche –
The psyche of a person that is their personality and characteristics also influence risk taking decisions. The response of people to profit or loss from their investments is critical. Some people are not good at accepting losses. The mentality, i.e is the thinking of a person plays a key role in investing. Having a positive outlook while investing helps earn more. Hence, adventurous and daring people are better positioned mentally to accept downside risk.
b) Depending upon Family Information:-
1] Earning Members –
If the number of members earning in a family is high, then they have more amount to invest. There is no need to worry about few losses. This also means that their risk appetite is also high. Therefore, risk appetite increases as the number of earning members increases.
2] Dependent Members –
The number of members dependent on the earning member is of great influence. Fulfilling the needs and wants of all the members is a difficult task. Moreover, as there are more members dependent on the same person then there is not much scope to take risk. Hence, risk appetite decreases as the number of dependent members decreases.
3] Life Expectancy –
Life expectancy means the number of years a person might live. This number decides how to invest and when to reap the profits. If the life expectancy is low then there is no point planning for time period more than that. If the life expectancy is high then low risk is preferred. Thus, risk appetite is higher when life expectancy is longer.
c) Depending upon Financial Information:-
1] Capital Base –
A broad capital base means being financially sound. It provides a lot of scope for taking risk in investments. A higher capital base helps absorbs the losses incurred, if any. Having a high capital base acts a backbone. Therefore, higher the capital base, better the ability to financially take the downsides that come with the risk.
2] Regularity of Income –
Regular income indicates stability. A stable source of income is beneficial while investing. Knowing that there is income in the future can help take risks now. People with seasonal income cannot take high risks. Thus, people earning regular income can take more risk than those with unpredictable income streams.
These are just some of the aspects/factors that can help you analyse your risk taking capacity or appetite. Also the above are thoughts are derived by observing a general trend. People may behave differently.