Everyone is a brave investor when the market is going up. In 2021, when NEPSE climbed close to 3,200, it felt like nobody could lose. People were quitting jobs to trade. Relatives who had never heard of a P/E ratio were giving stock tips at weddings.
Then it fell. And plenty of self-described "long-term investors" sold everything at the bottom.
Risk tolerance is what you find out about yourself when your portfolio is down 30%. It's much better to think it through before that happens.
Two parts of risk tolerance
People often treat risk tolerance as a personality trait, like "I'm a risk-taker" or "I'm conservative". But there are really two separate things:
- Risk capacity: how much loss your finances can actually handle. This is about numbers: income, savings, debt, dependants, when you need the money.
- Risk willingness: how much loss you can handle emotionally without making bad decisions.
You need both. A young, single software engineer with no debt might have high capacity but panic at every red day. A retired person might feel very calm about risk but have low capacity because there's no salary to rebuild losses. Your real tolerance is the lower of the two.
Three honest questions
1. When do I need this money?
If it's for something two years away, you simply don't have time to wait out a long slump. That's not a personality question; it's a calendar question.
After the 2021 peak, the market took years to move back toward those levels. If you needed your money in 2022 or 2023, waiting it out wasn't an option.
2. Could my family handle the loss?
A single person with a stable job and no dependants can take more risk than someone supporting parents and kids on one income with a home loan.
Think about:
- How stable is your income?
- Do you have an emergency fund?
- How much debt do you have?
- How many people depend on you?
- Is this money a small part of your savings, or nearly all of it?
3. What would I actually do?
Picture this. You open Mero Share and see that Rs 5 lakh has turned into Rs 3.2 lakh. Everyone on Facebook is saying the market will fall further. Your spouse is asking why you put so much in shares.
Would you hold? Buy more? Or sell in a panic? Be honest, not heroic.
If you've been through a downturn before, look at what you actually did, not what you planned to do. That's your real willingness.
Risk isn't just price going down
When people say "risk" they usually mean the share price falling. But there are other kinds of risk that matter just as much, especially in Nepal:
- Liquidity risk: you want to sell, but there are hardly any buyers. Some smaller companies and debentures trade very little. Even if the "price" looks fine, you might not be able to sell at that price.
- Credit risk: the company or institution you lent to can't pay you back. This applies to debentures, deposits in weak institutions and, very visibly, some cooperatives.
- Inflation risk: your "safe" money quietly loses value. A savings account that earns less than inflation feels safe but loses buying power every year.
- Concentration risk: too much in one company, one sector or one place. (See my post on diversification.)
- Policy and regulatory risk: a new NRB directive, a tax change or a SEBON rule can affect whole sectors overnight. Our market is very sensitive to this.
- Fraud and operational risk: scams, hacked accounts, mistakes in orders. This one is mostly within your control.
"Low risk" doesn't mean "no risk". When someone describes a product that way, ask what exactly could go wrong, and what would happen to your money if it did.
A simple exercise
Write down the biggest loss you could live with, in rupees, not percentages. Percentages feel abstract. Rupees feel real.
"I could handle my investments dropping by Rs 1 lakh for a year or two without selling or losing sleep."
Now work backwards. If shares can fall 30–40% in a bad stretch (and they have), and your limit is Rs 1 lakh, then you probably shouldn't have much more than Rs 2.5–3 lakh in shares right now. The rest can sit in more stable places.
It's not precise, but it's a lot more useful than just saying "medium risk".
Risk questionnaires: useful, but limited
Banks, brokers and fund managers sometimes ask you to fill in a risk profile form. These can be a good prompt for reflection. But they're not a substitute for understanding what you're actually buying.
No questionnaire can tell you whether a particular company's debt is too high, whether a mutual fund holds the same shares you already own, or whether an "insurance plus investment" product is a good deal. Only reading and asking can.
Your risk tolerance will change
It's not fixed for life. It changes when:
- You get married or have children
- You take on a home loan
- Your income becomes more or less stable
- You get closer to a big goal like retirement or a child's education
- You go through your first real market crash
Revisit it once a year, and after any big life change.
The real goal
The aim isn't to avoid risk completely. That's impossible, and trying to do it usually means losing to inflation. The aim is to take only the risks you understand and can afford to live through, so that when the bad year comes (and it always does), you can stay calm and stick to the plan.
If you've thought this through and feel ready to start, the next step is getting set up: here's what Demat, Mero Share and a broker account each do.
General information, not personal financial advice. Rules, rates and fees change, so check with the official source (SEBON, NRB, CDSC, IRD or the Nepal Insurance Authority) before you act. Have a question? Leave it in the comments.
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