Yielding a healthy income from your investments is not so much about luck but the ability to manage risk.
If you are about to take a punt on an investment, have you considered the risk of what happens should the deal go wrong?
Risk is one of those unquantifiable things.
Some risks are obvious – like a matter of life or death – and some not so obvious, like what may be waiting around the corner.
Some people are ready to take more risks, while others are more cautious.
Five rules of risk
But bear these five simple risk rules in mind and you should be able to manage the unknown a t least a little better:
- The greater the return you are seeking, the more risks you will have to take. It’s a given in the financial world that if you want great returns, you need to take even greater risks.
- The greater the risk, then the greater the chance of losing some or all of your investment in the short-term
- So, if you are a short-term saver, you should not take any risks with your capital and remembering this rule should steer you away from sensible, more certain investments even if the yield is low
- If you are a long-term saver, then you have the opportunity to bear more risk as you should recover any losses over the time you are saving.
- Investing in equities is a proven strategy for outstripping the growth of most other assets in the long-term. Stocks and shares come with a risk, but also the chance of great reward. Average stock market funds have returned 17.6% year-on-year.
Climbing the risk ladder
Equities can be high risk for investors. So if you are saving over the short term or just cautious with your money, then look for your place on the investment risk ladder – from the top down:
- Emerging market shares carry the most risk
- European shares are next
- US shares take third place
- Japanese shares are just above medium risk
- UK shares are comfortably medium risk, along with
- Commercial property
- High-yield bonds are low risk, with
- Corporate bonds
- Gilts (Government bonds)while holding
- Cash has no risk
All investors now have to do is match their expected return against degree of risk to find the most appropriate investment for them.
Don’t forget some of the biggest investment mistakes arise from mismatching expectation with risk. Any high return, low risk deal should be treated with suspicion.
