There is hardly anything in life that doesn’t involve taking some risk – even getting out of bed in the morning! 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.
Many people are fearful of investing because all they focus on is the risk of losing their hard-earned money, while others look for great returns and forget about the risk entirely.
Here is a handy checklist to keep you focused on maintaining a balance:
Risk and return
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.
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.
Know your time frame
- Short-term goals require short-term tools, long-term goals require long-term tools. Using the wrong investments, that don’t match your time frame, can lead to serious disappointment. Seek expert help to find the right tools.
- It is easy to make assumptions and accept the information you are given. Financial jargon and investment specific terms can cause confusion. If you are unsure about anything, ask questions!
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.
As with anything, there has to be a balance.
Mix up your investments
- Diversifying means you take on more ‘uncorrelated’ risk. The more different asset classes you expose yourself to, can deliver a higher probability of more consistent returns.
- Be consistent. A rigorous and systematic approach will beat a constantly changing strategy every time.
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.
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.
Just like achieving other goals in life, you need to decide how much risk you are prepared to take in chasing higher rewards.
If you require further information on sequencing risk, please reach out to your local RSM financial adviser.