All investments involve some level of risk. In fact, investments that make money do so in the face of and because of risk. However, many investors have little awareness of the risks they are taking – with property, buying and selling shares, putting their money into managed funds and all other types of investment. Quite often, they have little idea of how to independently manage their investments well.
THE GOOD AND BAD OF INVESTMENT RISK
An investment with high risk means that you have a greater chance of losing your money. However, investments that carry a high risk simultaneously present the opportunity to make significant and attractive financial rewards if they do well.
INFORMATION AND EDUCATION
Learn forex trading basics, the best ways to invest in shares, the best strategies for growing a self-managed superannuation fund (SMSF), and so much more.
Investors should take steps to understand and learn as much about the risks attached to particular investment opportunities as possible. For example, it is straightforward enough to access quality forex training courses that deliver currency trading basics and help investors learn to trade. Similarly, expert advice and stock recommendations can assist you to compile a healthy stock portfolio.
HOW TO APPROACH RISK
Accepting that all investment carries some degree of risk, it is necessary to measure the potential for reward against the risk of loss. As you go about creating a philosophy for your personal investments, you need to develop an appreciation of the delicate relationship between risk and reward.
(i) Carrying risk –The relationship between risk and reward can be thought of as follows: ‘When risk is high, the higher the potential returns. But, the higher the risk, the less likely it is for an investmentto deliver these higher returns.’
With sound advice and good understanding, you are best positioned to gauge the relative risk of different types of investment, and thereby, determine your own comfort level.
(ii) Losing money –Of course, no one wants to lose money; we work hard for it and want it to work hard for us. When thinking about investment risk, most people are understandably concerned with the likelihood of money being lost.
(iii) Considering risk –The following questions are useful when considering risk:
- Is it probable that my investments will lose money? – This question examines whether the safety of your principal amount is more important than its growth.
- Is the achievement of my investment goal likely? – Will you be disadvantaged in some way? (For example,will you have inadequate funding for retirement?)
- Do I feel comfortable taking on more risk in order to achieve higher returns? – Can you live and cope with the stress of high-risk investments?
CONTROL OF YOUR INVESTMENT PORTFOLIO
Many investors cannot cope with the stress and unpredictability of high-risk investments and find that investments of this nature have a negative lifestyle impact.
The good news is that investments do not have to induce stress and worry, and investors can mitigate some of the risk that accompanies investing by diversifying their portfolio; for example, including stocks, bonds, property and term deposits.
Ultimately, risk and investment go hand in hand – risk is a part of investing. Investors must determine their risk comfort level and create a portfolio that reflects their expectations and ability to manage risk.