4 Ways to Manage the Risk of Investments

Risk to one person might mean abseiling off a 30-metre cliff. Risk to another might be walking across a busy road. It’s the same with investment risk. We each have vastly different risk tolerances, and that’s why it makes sense to manage risk according to your individual preferences and goals.

When investing, whether it’s in shares, bonds or property, keep in mind that risk is unavoidable. By playing it safe, you can keep risk in check, but your investment returns may well be limited. The higher the investment risk, the higher the likely returns. As an investor, you must decide what level of risk and level of anticipated return you’re prepared to make.

Once you’ve decided on the level of risk you are comfortable with, here’s what you can do to safeguard your investments.

1. Improve the odds

A diversified portfolio of investments is your best ally when it comes to turning risks into success. Don’t place all your wealth in one asset, one asset class or one industry. Avoid overweighing yourself with, for instance, property or mining shares – concentrated portfolios can fall faster and take longer to recover.

Investing in a variety of asset classes, including cash, fixed interest, property and shares, means your overall returns will be less volatile as you’re not too heavily exposed in one asset. Different industry sectors perform differently and peak at different times, so consider investing some of your money in industries like energy, financials, health care, industrials and information technology.

The degree to which you diversify depends on your tolerance to risk. There’s no best choice of asset allocation – choose assets that are within your expertise and which give you a decent probability of good results.

2. Clarify your goals

Don’t panic and sell up as soon as the market drops. Expect some volatility and be prepared to make a reasoned assessment of whether you can absorb short term losses for long term gains.

Rather than abstractly focusing on ‘making money’, set goals for what you want to achieve with your financial gains. An overseas holiday? Retirement? Private school education?  Establishing clear goals will make it easier for you to manage your investments without making emotion-driven mistakes.

Think about the psychology of waiting in a long queue – it’s easier if you know how long you have to wait. Similarly, investment is easier to manage if you keep your eyes firmly on the end prize.

There is nothing wrong with being afraid – fear is a perfectly normal part of risk-taking.

3. Know yourself

What is frightening to one person is commonplace to the other, simply because everyone has a different stimulation threshold. Be aware of your bias so that you can make objective decisions about managing your investments. Sort out your choices by evaluating the pros and cons of the situation.

The most important aspect of your risk profile is age. A younger investor can afford to take higher risks as there is time to recover from downturns. An investor nearing retirement may be better off de-risking their portfolio by moving to safe investments and making adjustments to provide more income.

4. Seek expert advice

To help with decisions about protecting your investments, you may want to seek expert advice. Your Yellow Brick Road financial adviser can make investment recommendations based on your tolerance for risk, your financial capacity to incur loss, your level of experience with investments, and your long term goals.

We give recommendations about investment products relevant to your circumstance. And we can actively manage your portfolio to ensure your investments are working towards your goals. We’re qualified to give personal financial advice and to safeguard your investments.