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. As with anything, there has to be a balance.
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.
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.
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.
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.
It is easy to make assumptions and accept the information you are given. You must test the assumptions through questioning.
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.
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.
Be consistent. A rigorous and systematic approach will beat a constantly changing strategy every time.
Investing requires you to make judgements rather than following a script. It is better to be approximately right than to be precisely wrong.
It is all about risk and return. Accepting and managing the risk may help you realise the return you desire.
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.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, Coral Coast Financial Services and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you wantmore information.
Coral Coast Financial Planning Pty Ltd ABN 18 108 580 794 Coral Coast Financial Planning Pty Ltd ABN 18 108 580 794 is an Authorised Representative and Credit Representative of Hillross Financial Services Limited ABN 77 003 323 055, AFSL 232705.