What is Risk vs Return?
Investing can be a great way to grow your money and reach your financial goals. However, it is also important to understand that there is the possibility that you will lose money, or you may not get the return you were hoping for.
All investments carry risk – even investing in cash. Market conditions, inflation, changes to interest rates and economic downturns can all have an impact on your investment.
There are different types of investment risk. One example is market risk – you buy some shares and after a month, the value of those shares reduces by 10%. Another example is inflation risk – that is, your money can buy less goods and services than it could 2 years ago because the cost of goods and services has gone up.
You may be thinking that risk is a bad thing. Quite the opposite. Generally, the higher risk you’re prepared to accept, the higher the potential return. Plus, risks can be managed. Below are some simple ways you can manage risks to help you take advantage of the highs and the lows to reach your financial goals.
Time can be your best friend when it comes to managing risk.
When considering an investment, look at the recommended investment timeframe. Generally, the higher the risk, the longer the recommended investment timeframe. Having time on your side, means you don’t have to panic when there is a market downturn. You can wait for the market to go up again which they generally do. Look at the graph below. It shows the many events over time that caused significant share market crashes. Over time the market recovered.
If you don’t have time on your side, investing in something that is as volatile as the share market, probably isn’t the best idea. Investing in less volatile types of investments can be a better option.
If the thought of the value of your investment going down in value keeps you up at night, then taking on too much risk may not be a good idea.
It’s good to reflect on your goals and what amount of risk you are realistically willing to take on. If you want to achieve high returns but are not willing to take any risk, you need to accept that your earning potential may not be as high.
The below graph shows how different asset classes performed over time. As you can see, some asset classes are more volatile than others but over time, some perform better than others.
It is a balancing act. You don’t want to play it too safe and miss out on returns, but you also want to be able to sleep at night and be confident with your investment even when there are downturns.
Spreading your money across different types of investments rather than relying on the one asset class may help deliver more consistent returns. It can help shelter your investment from a fall in a particular market.
Knowledge and expertise
The more you understand about investments and financial markets, the better you’ll become at making decisions that are appropriate for you and your goals.
You can also outsource this knowledge and expertise. A managed fund for example allows you to invest but not do the work. You pay a fee and leave it up to the professionals. This can be a good strategy when you don’t have the time or will to research markets and buy and sell assets. You can also talk to a financial adviser.
A Wealth specialist can help guide you. Make an enquiry today.
Where do I start?
Investing can help you reach your financial goals sooner but can be overwhelming sometimes. We’re here to help simplify the process and help you get started.
Asset classes explained
Asset classes refer to the different categories that investments with similar features can be grouped into. Becoming familiar with asset classes can help you to further understand what to expect from the various investment options available to you.
Why invest in a managed fund
A managed fund is a professionally managed investment portfolio that pools your money together with the money of multiple investors. An Investment Manager then buys and sells shares or other assets (property, cash, bonds etc) on your behalf.
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