Within the world of investing itself, there are also different levels of risk attached to different types of investments.
As a general rule, the more money you stand to make, the more money you stand to lose. Meaning you typically need to take on more risk to achieve higher returns.
There are a few key things to keep in mind when deciding what level of risk you are comfortable with.
When do you need your money?
If you’re retiring in the next one to two years, for example, it probably isn’t the right time to put all of your savings into a high risk investment. You may be better off choosing something like a cash account or some bonds that will protect the bulk of your money, while putting just a small sum into a more growth-focused option such as shares.
Or, you may be a few months away from putting down a deposit on your first home loan. In this case, you would probably also choose a more conservative investment that keeps your savings safe in the short-term.
On the other hand, if you have just recently started working and saving, you may be happy to invest a larger chunk of your money into a higher risk/higher potential returns investment, knowing you won’t need it in the immediate future.
Learn more about the different types of investments and how to diversify your portfolio.
Can you comfortably watch your balance go up and down?
Some people find it easy to stay relaxed while their investments rise and fall in value. Others feel nervous if their assets drop in value by even the tiniest amount.
If you’re going to lie awake at night worrying, it’s not likely to be worth the personal cost, no matter how high the returns you might make.
Talking to someone about your ability to cope with financial stress can help you decide how you feel about taking on investment risk, even if it’s just a member of your family or a friend whose opinion you respect.
A professional financial planner should also be able to help guide you through some different options and outline the different levels of risk involved.
How to reduce your risk
No matter what your temperament, exposing your hard-earned savings to any kind of risk will always be a bit scary – especially if you’re doing it for the first time.
Some simple strategies to reduce risk that even the professionals still follow include:
- Think long-term: While there are exceptions, fluctuations in the value of your investments should even out over time, so the longer you stay invested, the less investment risk you are exposed to
- Choose the right investment for you: Thinking about your goals, how soon you want to access your money and how likely you are to worry will help you decide which investments are right for you
- Don’t put everything you’ve got into one investment: Spreading your money across different types of investments may protect you from sudden market falls and deliver more consistent returns over time
- Learn how things work: The more you understand about investing and financial markets, the better you’ll become at choosing the right investments for you. You’ll also be less likely to act blindly on a tip you might hear from a family member or friend, without first doing your own research