As with anything, there has to be a balance and we provide you with 9 ways to manage your investment risk below. There is hardly anything in life that doesn’t involve taking some risk – even getting out of bed in the morning! Many people are fearful of investing because all they focus on is the risk of losing their hard-earned money. Others look for great returns and forget about the risk entirely.
In the majority of investment structures, risk and return are related. The more risk you take, the more return you can potentially make (and vice versa). But there are ways in which this “risk” can be managed without defaulting to low-return investments.
Here is a handy checklist to keep you focused on maintaining a balance with 9 ways to manage your investment risk.
To get ahead, your investment return needs to take account of tax and also stay ahead of inflation. Many low-risk investments such as bank savings accounts often do not achieve that goal. To make any gains, you must take calculated risks.
2. Learn more and be aware
Many investment disappointments come from lack of knowledge. You must ask questions until you understand the investment. If you do not understand it, do not invest in it.
3. Rely on experience
Software and mathematical models can increase understanding but in the end it is people who make the difference. Smart investors seek the help of experts and rely on data, research, market assumptions and remove the emotion out of investing.
4. Never assume
It is easy to make assumptions and accept the information you are given. You must test the assumptions through questioning and understand the risks, details and potential implications of any investment.
5. Understand the risks
It can be tempting to pretend that a risk is small if something sounds really good. You must accept that risk always exists. Discuss it openly with your adviser so it can be managed. There is no get rich-quick-scheme or any guaranteed return above the cash rate, so be aware of those that promise investment returns that seem too good to be true or ‘the next big thing’
6. Mix up your investments
Diversifying means you take on more ‘uncorrelated’ risk. The larger number of small and different investment risks you take can provide a higher probability of more consistent returns while minimising your risk in one asset class or investment.
7. Stay focused
Be consistent. A rigorous and systematic approach will beat a constantly changing strategy every time, try to take the emotion out of your decisions. Remember, it is easy to feel like we can take on more risk when markets are good, but if your portfolio and the market is down, are you willing to still take that risk?
8. Use common sense
Investing requires you to make judgements rather than following a script. It is better to be approximately right than to be precisely wrong.
9. It’s not just about returns
It is all about risk and return. Accepting and managing the risk may help you realise the return you desire, while still achieving your goals and investment objectives.
Just like achieving other goals in life, you need to decide how much risk you are prepared to take in chasing higher rewards. Talk to us about what best suits your situation or what options are available for you.
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