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Managing risk
In general terms, the greater the investment growth potential, the greater the investment risk. However, there are various ways to manage investment risk while allowing your investment the opportunity to grow over time.
1. Know your investor profile
Investor profiles are often (but not always) linked to your stage of life. If you’re younger, working full-time and therefore not reliant on your investment to generate income, you may feel more comfortable with higher risk investments. However, if the idea of short-term fluctuations in investment returns makes you nervous (perhaps you need access to your money in the near future and can’t risk a short-term loss of some of that money), a more conservative option would be more appropriate.
Investors generally fall into one of three categories:
- Aggressive;
- Moderate; or
- Conservative.
To identify your profile, click here.
It also pays to know your goals for investing (e.g. saving for an investment property) and have a firm view of your time horizon.
2. Diversification
This means spreading your money/investments across various asset classes to reduce the impact that a drop in the performance of one asset class, may have on your overall investment portfolio. Much the same as the old saying, “Don’t put all of your eggs in one basket!”
Because the various asset classes don’t perform in sync with each other, (and react to market/global/economic events in different ways), a low return in one asset class or investment can be counter-acted by stronger returns in another.
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Calculators |
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Further Information |
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