How to select risk and returns
What is investment risk?
Typically, when you are investing your hard-earned money, the idea is to ensure it continues to grow. Whether you are saving for retirement, children’s education, or saving money to invest into property, the importance of your investments cannot be underestimated. However, many investors overlook the fact that the higher the return they are seeking, the higher the risk they may be taking.
Understanding investment returns
Every investment has the potential for a different rate of return. This largely depends on the amount of risk that an investor is making when they purchase an asset, equity, or even a fund. Each investor must decide and evaluate for themselves how willing they are to risk their initial investment.
What is your risk tolerance?
No two investors have the same tolerance for risk. Those who are investing small sums of money over a regular period of time may be more willing to take risks than those who have significant sums to invest at one time. One of the options investors have is to invest part of their funds into higher risk investments while leaving another portion in those which offer a lower risk. However, it is always important to keep in mind that the lower the risk, the less potential return you are getting on your investment in most cases.
How interest rates change risk and returns
There is news indicating increased interest rates in the future. For most investors, this means basic savings accounts will see a modest increase in savings rates. Investors should work closely with their adviser to determine if there are new opportunities that offer a higher rate of return with modest risk. Any time interest rates change, there is an impact on the overall market which could mean you are taking risks you may not be aware of.
Evaluating your investment portfolio on a regular basis can help maximise your return while minimising your risks. All investors should have an investment plan that carefully balances their desire for continued growth with their willingness to accept volatility and risk. There is never a guarantee with any investment, but understanding the risk is imperative if you are going to continue to make investments. Your financial adviser should work closely with you to make sure they understand your goals as well as the amount of risk, volatility and tenure you are willing to take.
Some investors are more willing to take risk for the potential rewards of higher returns on their investments. When you are saving for your children’s education and have several years to make your investment goals, you might be more willing to accept a higher risk. However, if you are approaching retirement and are concerned about more volatility on your investment, lower risk options may be better. As each individual’s circumstances are, naturally, different when it comes to investments, it is highly recommended that advice is sought from a professional financial adviser. Wealth management professionals are specialists in helping their clients – at whichever stage of life or whatever their appetite for risk/return – to achieve their long-term investment objectives.
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Mike Coady is an award-winning financial expert and a well-known leader in the financial industry.
Blog published by Mike Coady