Investing and risk go hand in hand, but it shouldn’t cause sleepless nights.
When you invest, you buy an asset or put your money somewhere in the hope of increasing the value of the asset or getting an income from it – or both.
Investment risk is the chance that the value of an investment will drop. Generally, the higher the chance of a loss occurring, the higher the investment risk, and the higher the expected returns should be.
All investments have risks. It could be the risk of losing all the money you have invested, or it could be the risk of investing conservatively and not having the return on your investment match inflation (which means your money loses its buying power and is worth less over time).
Understanding the risks associated with your investments and making decisions based on your tolerance to risk will allow you to sleep comfortably at night
A few ways to manage risk
Risk vs return
Reducing risk through diversification
When looking at where to invest it’s important not to put all your eggs into one basket. It shouldn’t be a matter of choosing between shares or property, but rather balancing your portfolio of investments. This is called diversification.
No one type of security, asset class, investment strategy, or investment manager can provide the best performance all the time. So a range of investments should reduce the risk of investment experiencing drops in performance across the board, all at the same time; simply because one investment can perform well to offset the poor performance of another.
You can even diversify within a type of asset by investing in property in different regions, states, or countries, and you can buy shares in very different countries. For example, buying shares in mining companies as well as banks and internet companies across Australia and overseas is diversifying.
The mix of various assets within your investment portfolio is called asset allocation, and it is one of the most important considerations for any investment portfolio, within or outside of your super.
What type of investor are you?
Everyone aims for the highest returns on their investments…but how far will you go to make that happen?
Will you lose sleep if there’s a market downturn? How long do you have until retirement? How much time do you have to make investments work for you to match the goals you want to achieve?
There are three basic types of investors – conservative, balanced, and aggressive – and your investment strategy needs to match you goals and the type of investor you are.
Your choice of investment strategy should be made on the understanding of ‘how you feel about risk’.
Other info you might be interested in
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