How to decide how much risk to take when investing

1)Look for information about existing investment options

The financial market offers a wide variety of options, for those who want to put their money to work and obtain profitability.

Among the options listed as favorites are fixed income investments, stocks and mutual funds.

One way to choose the type of investment that is right for you according to your age is the Rule of 120. It aims to calculate the risk obtained with an investment according to the age of the investor.

To start investing in the future, the first thing to do is:

Gather all the necessary information about personal finances.
Know the relationship between income and expenses. Set percentages to allocate the necessary expenses, savings and investments. Find other sources of income.

2) Know the financial behavior of the chosen market

According to the study “Financial culture of young people in Mexico” carried out by Banamex-UNAM, 56% of the economically active population is experiencing financial problems to survive, with little or no chance of saving or being a candidate for bank loans. .
The current economy has raised the importance of making decisions about what the future holds in financial matters.

In addition to the economic imbalance that generated the global pandemic of COVID-19 (coronavirus), this issue is even more worrying if you belong to an economically active generation that has lost the right to a pension.

Today, young people who were born between 1981 and 1994 – the generation of the millennium – must ask themselves what to invest in or what is the best strategy for a good investment.

The fear of investing is greater than before and financial anxiety increases over time. Every person of working age should start preparing for retirement, even if it seems like it is a long way off.

To start building wealth – personal or family – it is important to know the best investment strategies and not to be carried away by fads that promise a quick and effortless return.

There are hundreds of books, studies and articles on the importance of investing in our most productive years. Therefore, in the following we will talk about the most important investment tips that can not be missing in your financial planning.

Investment tips to increase your capital
The path to achieving a future of economic stability begins by listening to and assimilating the knowledge of others who have made a career in the area and who can teach a lot about it.

One of them – perhaps the most famous – is the investor Warren Buffet, for whom the investor is not the one who does extraordinary things, but the one who manages to avoid a greater number of mistakes.

The risk tolerance profile, in addition to the available capital, is another criterion that must be considered when choosing where to invest your money. Profiles are generally classified as conservative, moderate and aggressive. In the financial market, there is a directly proportional relationship between risk and profitability

Warren Buffet quote

3) Look for information about existing investment options


The financial market offers a wide variety of options, for those who want to put their money to work and obtain profitability.

Among the options listed as favorites are fixed income investments, stocks and mutual funds.

One way to choose the type of investment that is right for you according to your age is the Rule of 120. It aims to calculate the risk obtained with an investment according to the age of the investor.

To start investing in the future, the first thing to do is:

Gather all the necessary information about personal finances. Know the relationship between income and expenses. Set percentages to allocate the necessary expenses, savings and investments. Find other sources of income.

4) Know the financial behavior of the chosen market

According to the study “Financial culture of young people in Mexico” carried out by Banamex-UNAM, 56% of the economically active population is experiencing financial problems to survive, with little or no chance of saving or being a candidate for bank loans. .

However, a significant part of this generation has savings, most of which are stuck in debit accounts.

Knowing the financial behavior allows you to apply a strategy according to the possibilities and the willingness to take risks, as well as in terms appropriate to your investor profile.

You should not invest in what is not well known and not understood. The time it takes to understand the financial behavior of the markets in which we are interested in investing, will make the difference between a successful performance or a loss of capital.

The financial market – as well as its different products – is constantly changing, so you should not rely on current figures, but rather review the history of a few years to confirm that the said company or product has remained stable over time.

Peter Lynch, one of the most successful investors, advises to invest only in what you know.

  • 1) Time: Before making any investments, you should always determine how much time you have to keep the money invested. If you have $ 20,000 to invest today, but you need them in a year to pay for a new home, investing money in high-risk stocks is not the best strategy. The riskier an investment is, the greater its volatility or price fluctuations. So, if your time horizon is relatively short, you may be forced to sell your bonds at a significant loss. With a longer time horizon, investors have more time to recover from any possible losses and are therefore theoretically more tolerant of higher risks. For example, if that $ 20,000 goes to a lakefront cottage that you plan to buy in 10 years, you can invest the money in high-risk stocks. Because? Because there is more time available to recover any losses and less likely to be forced to sell the position too soon.
  • 2) Bankroll: Determining the amount of money you can lose is another important factor in finding out your risk tolerance. This may not be the most optimistic method of investment; however, it is the most realistic. By investing only money that you can lose or keep tied up for some period of time, you will not be pressured to sell any investments due to panic or liquidity problems. The more money you have, the more risk you can take. Compare, for example, a person who has a net worth of $ 50,000 with another person who has a net worth of $ 5 million. If both of you invest $ 25,000 of your equity in bonds, the person with the least equity will be more affected by a decline than the person with the greatest equity.

7) Protect yourself from inflation Continue to invest in the stock market

Stock investment is an effective protection against inflation because the stock market tends to overcome inflation. This dynamic is maintained for long periods of time, although it may collapse in the short term if inflation increases. Rapid inflation is difficult for companies – they absorb higher prices too and need to use more money to maintain the same level of productivity.

When deciding where to invest, look for the accumulated inflation data for the last twelve months and the outlook for the following year. That way, you will be able to choose applications that yield more than inflation.

8) Evaluate operating costs

Most financial investments have costs, such as administration fees, brokerage fees, custody (custody of securities) etc. Depending on the amount invested, costs can impact the real profitability of the investment.

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  • We recommend reading The Intelligent Investor, the greatest investment advisor of the 20th century, Benjamin Graham, taught and inspired people around the world. Graham’s philosophy of “value investing”. It protects investors from substantial mistakes and teaches them how to develop long-term strategies. Click on the link or button below to see the book.

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BRUNO COSTA