Risk is personal, but there are two different questions hidden inside the phrase “how much risk can you take?” One concerns how comfortable you feel with uncertainty. The other concerns what a loss would actually do to your finances.
Risk appetite is about willingness
An investor may feel comfortable seeing the value of an investment move sharply. That willingness can be influenced by experience, goals and how the investor reacts to uncertainty.
Capacity for loss is about financial impact
Being emotionally comfortable with risk does not mean a large loss would be financially manageable. Money needed for essential spending, emergency reserves or a near-term commitment may have little capacity for loss even where the investor describes themselves as adventurous.
Time horizon matters
A longer time horizon can change how an investor thinks about short-term market movements, but time does not remove risk or guarantee that an investment will recover.
Different risks behave differently
Market volatility is only one form of risk. Investors may also face liquidity risk, credit risk, concentration risk, currency risk and the possibility that an investment is difficult to value or sell.
Put risk in the context of the whole portfolio
The FCA highlights diversification as one way of reducing reliance on any single investment or market. Understanding existing exposure can therefore be important before adding another investment with similar risks.