Financial investments are always associated with some level of risk. Anyone who wants to invest should know and understand the risks of an investment in advance. In addition, investors should understand what amount of losses they can afford financially, and how much risk they can tolerate, and still be able to sleep at night. Both financial circumstance as well as individual attitude will determine someone’s personal risk tolerance.
Misjudging your own risk tolerance can have a significant impact on long-term wealth accumulation. For example, someone who overestimates their own risk tolerance when investing in equities may be likely to sell the shares again at the first drop in price. In doing so, they would realise losses and possibly miss the subsequent price upswing, which costs them returns in the long run. On the other hand, those who consider their own risk tolerance to be too low and invest too conservatively as a result, would likely achieve a significantly lower return in the long term than they should.
Individual risk tolerance is typically determined when investing through a wealth management service such as Scalable Capital's digital wealth management service ("Wealth") through a survey to determine individual capacity for losses and attitude towards risk. For this purpose, variables such as investment horizon, income situation, assets and investment goals are collected.