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Willingness to take risks

Personal willingness to take risks determines to what extent an investor is prepared to accept price fluctuations and losses. It has to be differentiated from the investor`s objective ability to take risks.

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

“Which losses am I prepared to bear“?

A wealthy investor who solely invests a fraction of his wealth and who in addition to that receives a constant income will have a high ability to take risks. If he is however not willing to bear small losses, his willingness to take risks has to be considered as low although his ability to take risks is high. The low willingness to take risks thus limits a high ability to take risks.

On the other hand, a family man with high financial obligations, mediocre income and little wealth has a low ability to take risks. This objective ability to take risks limits the reasonable investment risk, even if the investor would be willing to invest in many risky products. Here a high willingness to take risks is being limited by a low ability to take risks. The asset manager is committed to point out such discrepancies prior to the implementing of a rather risky investment strategy and therefore has to discourage the purchase of risky investments.