Back to School: Risk 101

You found a wild investment! Do you take it? How to decide what’s right for you with guest host, William Kruglyak, and Ian Tam

Ruth Saldanha 1 September, 2020 | 12:46AM

 

 

William Kruglyak: Hello, my name is William Kruglyak and today I'll be talking to Ian Tam about risk.

Hi, Ian.

Ian Tam: Hi, William.

Kruglyak: What is risk appetite?

Tam: William, that's such a great question. And maybe a good way to explain it is to think about when you're skiing. So, when you're just learning how to ski, there's going to be different types of hills to ski down. So, if you're just starting out and learning how to ski, maybe you stick with the bunny hills. As you get better, maybe you start to go on the green hills or the blue hills. And maybe you know this, but the hardest hill is the double back diamond and that's a really steep hill with lots of bumps. So, risk appetite is, basically knowing for yourself which hill is the best for you.

Kruglyak: Why does it matter?

Tam: Another great question, William. It's very important to understand risk appetite because investing is actually a lot like skiing. You're trying to get to the bottom of the hill or you're trying to get to your financial goals. So, risk appetite is important because if you take on too much risk, maybe you go on a hill that's too steep or too dangerous for you, you could end up falling down or hurting yourself. And for investors, that means that you may not end up reaching your financial goals in a way that's comfortable for you. And that's why it's very important to understand your own risk appetite.

Kruglyak: Is it true that the more risk I take the better the returns?

Tam: Well, William, there is some truth to that. But maybe a better way to put it is that it's very difficult to get high returns without taking on a lot of risks. So, again, if you think about skiing, the fastest hill is the double black diamond hill which is very bumpy and kind of dangerous. So, if you are a skilled skier and you're able to withstand all those bumps and that steepness, then maybe that double black diamond hill is right for you and maybe a good way to reach your financial goals. So, it's really important to know how much risk you can take on before choosing your investment or choosing the right ski hill for you.

Kruglyak: Thank you for your time, Ian. For Morningstar, I'm William Kruglyak.

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Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca

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