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.
1 – 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.
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.
4 – Never assume
It is easy to make assumptions and accept the information you are given. You must test the assumptions through questioning.
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.
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.
7 – Stay focused
Be consistent. A rigorous and systematic approach will beat a constantly changing strategy every time.
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.
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 at Intrinsic, about what best suits your individual situation.
Intrinsic Private Wealth specialise in providing financial advice to Australian investors. With over 20 years of experience in the finance & investment industry.
General Advice Disclaimer: Information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. Intrinsic Private Wealth has financial advisers that are authorised to provide personal financial advice. Call 02 9615 4500 for more information on our available services.