Whether you’re getting into investing for the first time, or looking at how you might expand your existing investment portfolio, it’s important to understand your risk profile. Once you have this key insight, discovering the kinds of investment that will help you meet your goals will be more straightforward.
What is investment risk?
The risk when you make any investment is that you won’t get the return you’re hoping for, or worse, that you might lose your investment completely. You’ve heard the saying, ‘no risk, no reward,’ and this is exactly where that comes from.
High risk versus low risk
When you’re making a higher-risk investment, you’re looking for a higher return or more growth. But, there’s more chance of losing your money, or of seeing short-term fluctuations through market changes. A lower-risk investment generally avoids a ‘negative return’ or a loss of your investment, but will usually deliver lower returns.
Of course, you could opt for a shoebox of money under the bed for a zero risk situation. But even holding on to cash has dangers too, namely that inflation will increase and your stash will decrease in value.
Your investment goals
Before making any investment, it’s essential to set your goals. To do this, you’ll need to understand the following factors:
- How long are you looking to invest for?
- What is your overall financial position
- The type of returns are you hoping for?
- Do you need access to your money during the investment period?
- What is your level of investment experience and insight?
Building a diverse portfolio
When you begin to create a portfolio of investments, it’s a good idea to combine different kinds of investments with different degrees of risk. This will help to balance the risk you’re assuming, but this can be a technical process, and it’s best to talk to a professional in the planning stages.
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