On the road to building wealth, investors have a lot of challenges to overcome.
One of the biggest challenges is to manage risk in the share market. All investing involves risk and there is no one solution to overcome investment risk. This is because risk comes in many forms, and different forms of investments entail different risks.
That said, this doesn’t mean it’s impossible to manage your risk smartly. There are strategies you can employ to minimise the risk you face in your investments. Additionally, it’s worth exploring both low and high risk options as well as exploring the returns associated with different types of asset classes.
From fixed interest investments to corporate bonds, the right asset class/es for you will depend on your goals and your life stage.
What’s most important is that you are comfortable with taking the risks associated with your specific investments and that your investments align with your financial goals.
Here are some of the risk management strategies you can try to reduce the risk you face with your investment portfolio
1. Understand The Risk And Reward Of Your Investment
This means being clear about the nature of your investment and the reward it entails. Different investment options are broadly associated with different risks
Generally speaking, a low risk investment (such as high interest savings accounts, government bonds or other fixed interest bonds) generates low returns. While the opposite is true for high risk asset classes.
Higher risk asset classes (including property, shares and alternative investments) usually generate higher investment returns.
While there are ways to minimise your investment risk, you should always be comfortable with the investment you choose.
A financial adviser can help you gain an understanding of your personal risk tolerance.
2. Know How Market Conditions Affect An Investment
To manage risk, you also need to understand how certain investments react to certain market conditions.
Market risk and fluctuations are a normal part of the market – especially for higher risk investments which by nature fluctuate over the short-term. However, by looking at past performance and return expectations, you can build an investment portfolio you are confident in and comfortable with.
What are the best low risk investments?
The right low risk investments for you will depend on your personal and financial circumstances – particularly your financial goals. The lower risk asset classes are cash assets (such as savings accounts, and term deposits). This is because there is a lower risk of you having to lose money from these investment asset classes. Investing your money into a savings account also means your cash is liquid and readily available when you need it.
If you have a small risk tolerance, you may want to consider avoiding growth investments where you could lose money. If you need support with your investment decisions and which asset classes to choose, engage a financial adviser.
3. Create A Diversified Portfolio
Diversification is the golden rule of investing.
By having a diversified portfolio, you can be sure that the investment value of your portfolio is maximised. Plus, you can ensure that you minimise risk to align with your preferred risk tolerance.
Here are the four different asset classes in Australia you can diversify with:
- Equities (shares available on the Australian or International stock exchange)
- Cash (ie. a bank account or term deposit)
- Property (residential or commercial)
- Fixed Income/Fixed Interest (ie. corporate bonds or treasury bonds)
For example, you can split your investment money 10% cash, 30% stocks, 40% property and 20% bonds. The right asset class mix for you will depend on the investment risk you are willing to take, the investment returns you want and your financial goals.
How to Manage Risk of Investing with a Financial Adviser
While there are no guarantees in the investment market, you can manage risk by following these strategies and enjoying capital growth over the long term from your investment decisions.
What are your financial goals? What investment options do you have in your financial situation? And is your portfolio and asset class mix aligned to achieve your financial goals?
The key to success is to know what it is you are investing in and to have an understanding of how the investment behaves in different market conditions. Of course, there’s no way to eliminate risk, so understand your risk tolerance and make sure to stick to it!
TNR Wealth offers financial planning services to help individuals stay on top of their financial needs. If you are looking for a financial advisor in Lismore to help you with your investments, get in touch with us today!
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.