How Do You Choose the Right Investments for You?

Picture two investment options in front of you. The first gives you a chance at higher returns, but it carries more risk. The second is steadier, but its expected returns are lower.

You might lean toward the first while someone else prefers the second. Does that mean one of you chose right and the other chose wrong? Not necessarily. The right investment differs from person to person, depending on their goals, their financial situation and how comfortable they are with risk.

So what makes an investment a good fit for one person and not another? The answer comes down to two ideas: your appetite for risk, and your capacity to carry it.

What's the difference?

In investing, two ideas often get mixed up: risk appetite and risk capacity. They're related, but each one describes a different side of how you relate to risk.

Risk appetite

Simply put, this is the level of risk you're willing to take on when you invest, and how comfortable you are with the idea that your investments may swing in value or lose part of it. Your risk appetite is shaped by your personality, your past experiences, how you see investing, and how at ease you are with market ups and downs.

For example, one investor takes market swings in stride, isn't bothered when their portfolio drops, and is happy to go into high-risk investments in search of bigger returns. Another investor prefers steadier investments, even if their expected returns are lower.

Neither choice is better than the other. It depends on the investor and how much risk they're comfortable with.

Risk capacity

Unlike appetite, risk capacity isn't about what you'd prefer. It's about what your finances actually allow. In other words, it's how much risk you can absorb the results of without hurting your essential commitments or your financial goals.

Several factors shape your risk capacity. The most important are:

• Age and stage of life: A younger investor usually has more time to recover from market swings than someone approaching retirement.
• Income and financial stability: The steadier your income and the more your financial commitments are under control, the more room you have to ride out swings.
• Financial obligations: Loans, essential expenses or family responsibilities can reduce how much loss you can absorb.
• Your investment goals: How long you have to reach your goals plays a big part in how much risk you can carry.

So you might want to go into high-risk investments, but your finances may not allow it. That's where the gap between what you want and what you can actually carry shows up.

How do you balance appetite and capacity?

Now that the difference is clear, the bigger question is how to use both when making an investment decision.

Let's agree on one thing first: you can't invest without taking on some risk. Avoiding it completely can mean missing opportunities that help your money grow. On the other hand, taking on more risk than you can carry can expose you to losses that hurt your stability and your future goals.

So the point isn't to avoid risk or to chase it. It's to choose a level that suits both your appetite and your financial capacity. Before any investment decision, ask yourself two questions:

1. What level of risk am I comfortable with?

Think about how well you handle market swings, and how you'd react emotionally if your investments dropped in value. Could you stay invested through the ups and downs, or might a falling portfolio push you into hasty decisions?

2. What level of risk can I afford?

Look at your income, your obligations, your savings, your financial goals and the time you have to reach them. Then ask yourself: if I lost part of my investment, could I absorb that loss without it affecting my basic needs or my future plans?

Answering these two questions means being honest with yourself and having a clear picture of your current finances and your future commitments.

Invest with awareness, and choose well

Investing with awareness starts with knowing your goal and how much risk you can carry.

Don't let the pull of higher returns push you into more risk than you can handle, and don't let fear of market swings keep you away from opportunities that could help you reach your goals.

With Tamra Capital, you can choose from a range of investment portfolios at different risk levels to match your financial goals.

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This article is for financial education only and is not a recommendation to buy or sell any security.