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Investment Risk

All investments involve a degree of risk – even cash in the bank! And all of us have an individual risk tolerance – some of us are naturally cautious and just don’t like taking risks and others tend to fly by the seat of their pants and seem to thrive on risk-taking.

So it is important to match your investment risk profile with your personal risk tolerance, so you don’t end up a nervous wreck! But you also need to realise that low risk typically means lower returns and high risk typically means higher returns (but also a risk of catastrophic losses!).

What are the Risks?
There are different types of risk that may affect different investments:

  • Global Risk: The 2008 Global Financial Crisis is a recent example of global risk where by the economy of one country can affect the performance of investments worldwide.
  • Market Risk: Stock and bond prices fluctuate, but there is a risk that you lose money on your investment when prices drop. Most losses are over short term so as long as you don't need to sell your stocks, your investment will have the chance to recover from price declines and earn you a greater profit. There is also a risk with timing in that you buy stocks at the peak of the market and sell at the bottom of the market causing you to lose money on your investment.
  • Company Risk: This is the risk that the individual company in which you invest will fail to perform as expected.
  • Bond Risks: Specific to bonds, credit risk refers to the government's inability to repay principal plus interest to the bondholder. There is also a risk that the value of a bond may change from the time it is issued to when it matures. The longer the period to maturity, the greater the potential for price fluctuation.
  • Legislative Risk: Whatever laws the government passes today may be extinct tomorrow and new laws introduced also have the potential to affect investments in the future. Changing Tax laws are the most significant legislative risk, but other new laws can also affect individual company performances.
  • Inflation Risk: The risk that the rising costs of inflation will outpace the growth of your investment over time, and also the risk that you'll live longer than your income can support you.
A guide to investments from HIGH to LOW risk is as follows: But you also need to remember that low risk usually means low return, and that higher risk investments such as stocks typically outperform other investments in the longer term (say 10 years), but suffer wilder fluctuations along the way.

Getting the Right Mix

Getting the right mix of investments in your portfolio is an individual question and depends on personal your risk tolerance, your financial goals and where you are in your financial planning cycle.

Ideally, your investment portfolio should include a diverse range of stocks, bonds and cash - and even a mutual fund or two as well – taking note of the following.

  • IF you have a relatively long investment timeframe (10 years or more) AND you want to make some significant gains from your investment AND you can stomach market volatility…

    ….then STOCKS should make up a significant portion of your portfolio.

  • IF you have a mid to long term investment timeframe (5-10 years) AND you want to maintain growth while preserving your capital AND you can stomach some market volatility…

    ….then BONDS should make up a significant portion of your portfolio.

  • IF you have a mid to long term investment timeframe (5-10 years) AND you want to make steady gains from your investment AND you have no confidence in your ability to make investment decisions…

    ….then go with a MUTUAL FUND.

  • IF you have a mid to long term investment timeframe (5-10 years) AND you want to preserve your capital and maintain growth BUT you can’t tolerate much volatility…

    ….then PROPERTY could be a good investment choice.

  • IF you have a short term investment timeframe and want ready access to your money AND you just want to preserve the money you have AND you have no stomach for market volatility…

    ….then CASH is the way to go.
Of course, one of the golden rules of finance is that you can’t get something for nothing – in the case of investing, that means that you need to spend money to make money! Many people actually borrow money to invest, which is why it is so important to make wise and informed decisions about investing.

See a reputable financial advisor or accountant for advice before committing to ANY investment – and don’t fall for many of the investment scams around.
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We are not certified financial planners or advisors. The information in this website is general information only. Always consult a licensed financial planner before making any finance or investment decision.

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