Investing can be a highly effective way to grow your money and build a foundation for the life you want to create for yourself. It’s also important to be aware that investing is not a risk-free strategy and there’s always a chance you could lose money or not make as much as you expected. This is known as ‘investment risk’. All investments carry some risk due to factors such as inflation, tax, economic downturns and drops in particular markets.
Different types of investments carry different levels of investment risk, and also different returns. As a general rule, the larger the potential investment return, the higher the investment risk.
Cash provides lower returns and a lower risk of loss, while growth investments such as shares may provide higher returns and are higher risk.
While taking on any kind of risk can be a scary prospect, there are four key strategies you can use to minimise your exposure to investment risk.
How much risk you are willing to take on will depend on your situation. For example, if you have been saving for retirement and only have 12 months to go before you reach your goal, you would probably not want to risk losing the majority of that money. In this case, it would make sense to ensure you had an appropriate mix of defensive or conservative investments to protect the bulk of your money so you can access it in 12 months, while keeping a portion in growth investments for the years to come.
Some people remain relaxed and calm while their investments moves up and down, while others become nervous if their assets drop in value by even the tiniest amount. If you’re going to lie awake at night worrying about your investments, no matter what returns you earn, they’re not likely to be worth the personal cost. That’s why before you begin investing, it’s important to assess your tolerance for investment risk and talk with a professional.
If you’d like advice on managing investment risk and selecting investments that suit you, you can book an appointment online to organise your complimentary, no-obligation consultation with a Commonwealth Financial Planner.