Ability to take risks

Ability to take risk is the measure of financial independence from possible losses: The less the investor relies on the invested assets for covering his actual and future financial obligations, the greater his financial independence and therefore his (objective) ability to take risks.

To determine his ability to take risks, the investor has to answer the following question:

“Which risk of loss am I able to tolerate based on my actual and future financial obligations as well as bearing in mind expected living conditions (income, constant expenses, general life planning, expectancy of inheritance, pensions of first, second and third tiers?”)

A high ability to take risk is indicated, if only part of the assets are being invested or a young investor has constant income from his work which allows him to recuperate better in cases of loss. The other way round, a retired investor without income from work who finances his living mostly by returns from assets, indicates a low ability to take risks.

One must differentiate between the (objective) ability to take risks and the (subjective) willingness to take risks.