Should Younger investors take more risks?

Introduction

Risk is intrinsically tied to the world of business and finances.  Individuals who are more able to take on calculated risks that result in strong returns are often regarded to be better investors than those who don’t. However, it is widely accepted that risk taking has to be backed up with intensive research and knowledge of the industry, else the willingness to take risks blindly are losses in the making. 

This is often something that younger investors tend to forget, given how attractive becoming a young and successful investor is. There are a number of reasons as to why investing is attractive to young investors. It appears to be a quick way to multiply funds and the stock market holds a certain appeal for all individuals who are looking to be financially successful. But, should young investors take more risks? 

The upside of more risk for young investors.

1. Time:

One of the biggest upsides for young investors to take risks, is the fact that they have time on their side. If a young investor makes a bad investment or takes a bad trade and loses money they still have time to recoup funds and begin investing again. For investors who are older, doing this might be harder as they might have made significant investments to lay their roots in the market and may also have a number of financial obligations that must be met. Time also gives young investors the space for interest and market forces to do their work, and can give potentially higher returns in the process.  Given this availability of time to younger investors, it is recommended to set aside a part of one’s salary for investments and let compounding work its magic over time.

2. Amount of funds:

Unless a young investor has a big sum of money that they have gained as inheritance or through other sources, chances are they are functioning on limited capital. Therefore, their investment amounts will be lower as well. Furthermore, they will invest lesser amounts as they are earlier in their career and would be saving/spending a good chunk of income. Thus, if youngsters want to invest in higher risk equity funds, it is ideal to do so through monthly SIPs and give them at least 3 to 5 years to grow. 

3. The risk to reward ratio:

Put simply, it is more worthwhile for young investors to take on risky investments as they have time on their side for the risks to pay off. Yet, they must go about it in a sensible manner and equip themselves with the financial knowhow so as to not incur losses.

Additional Read: Five reasons why your 20s are the best time to start investing

Why younger investors should not take on more risk without financial knowhow

1. Lack of Experience:

Young investors, as driven and motivated as they might be, simply lack the knowledge and experience in the market. This puts them at a disadvantage as they are less equipped to understand how the market functions and therefore analyse an accurate outcome for their investment. Thus, it is important to take calculated risks after assessing the market and learning from one’s mistakes.

2. Poor Investing habits:

Studies have shown that while young investors take more risks, their returns when compared to experienced investors are significantly lesser. There have been multiple reasons for this outcome, with one of them being that young investors have a tendency to invest large and disproportionate amounts in stocks they favour. This leads to a lack of diversity in their portfolio and steeper risk. 

3. They like to win big:

Young investors might have higher aspirations for their career in the stock market, making them more likely to take trades in high volatility markets that they think might give them bigger trade-offs. The downside to this however, is an exponential increase in the risk they take on. Given the high market volatility, the probability of making a profit or loss nears closer to the fifty - fifty mark, causing them to potentially make reckless investments that could land them in a significant loss. 

Additional Read: Investing in different asset classes based on their risk

Conclusion

For young investors, the potential of making large sums of money off of securities such as stocks is alluring. However, it could also cause them to make investments that are not well thought out and take on blind risk instead of calculated risks, increasing the potential of them losing out from the market. If you’re a young investor seeking to invest in a wide number of investment options, Tata Capital’s Moneyfy App can help you streamline your investments and start you off on your journey to achieving your financial goals.

The app first helps you select your required financial goals, be it retirement, marriage, a house amongst others. Based on your choices, Moneyfy will help you invest in a variety of mutual funds across themes through either SIP or a lump-sum payment. Moneyfy’s Mutual Fund Scanner will help you find and compare the right investment options, allowing you to gain exposure to wide variety of securities. What’s more, you can invest in highly liquid funds and withdraw up to Rs. 50,000 instantly, ensuring that you are able to meet your immediate financial requirements at any time. These are complemented by Insurance and loans offerings that ensure that you, as a young investor setting out to make their fortune, are safely able to finance your personal goals.