Investment Risks -Spreading Your Investments (Part 1)
When deciding whether to invest, it is important that any investment vehicle matches your feelings and preferences in relation to investment risk and return. Hence your asset allocation needs to be commensurate with your attitude to risk. Another key question to ask yourself is: 'How comfortable would I be facing a short-term loss in order to have the opportunity to make long-term gains?' If your answer is that you are not prepared to take any risk whatsoever, then investing in the stock market is not for you.
However, if you are going to invest, you need to be prepared to take some calculated risk in the hope of greater reward. Risk is an implicit aspect of investing: shares can fall, economic conditions can change and companies can experience varying trading fortunes.
The process of deciding what proportion of your investment portfolio should be invested in different types of investment is called 'asset allocation'.
The four main asset classes are:
These asset classes have different characteristics for risk. When you are young, you may want to invest in assets with a higher potential for growth but greater risk, because you have the time to benefit from their long-term growth. As you get closer to retirement, you may want to choose more conservative investments that are steadier in both risk and return.
There is a wide variety of different asset classes available to invest in and commensurate risks attached to each one. While these implicit risks cannot be avoided, they can be mitigated as part of the overall investment portfolio by diversifying.
If you put all your eggs in one basket, you are more vulnerable to risk. Different investments behave in different ways and are subject to different risks. Saving your money in a range of assets helps reduce the loss, should one of your investments suffer a downturn.
In our 2nd part we will cover diversification, growth, security and other risks you may need to understand. For more information or to speak to one of our advisers, contact us today.
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