Personal

Risk versus return

When deciding what to include in your investment portfolio, you need to consider how much risk you are prepared to take and what return you are willing to accept from your investments.

Investing involves a trade-off between risk and return. Different asset classes have different risks and generally the higher the risk, the higher the potential for greater returns but also the potential for greater losses. While cash offers lower risk it also offers lower returns. At the other end of the spectrum are shares, which are higher risk but can potentially offer much higher returns.

Understanding and managing risk

Think long term

When choosing your investments you should consider what your investment time frame is. This can greatly affect your attitude to risk and how you invest. For example, if you set a longer time frame, say seven to 10 years, then you may wish to invest in shares and other assets which may fluctuate in value in the short term but have the potential to provide higher returns in the long term.

Diversify your investments

No asset class performs well all the time and usually when one is performing well another will not. By spreading your investments across different asset classes you spread the risk. If you have a diverse portfolio, you can minimise your exposure to loss if one of your assets is not performing well over a period.

Don't try to time the market

It is near impossible to pick when is the best time to invest in the market. By trying to anticipate the right time, for example if you were to sell when the market is down, you could be removing yourself just as the market is about to pick up and you miss out on the potential for future returns. Successful investing is about time in the market, not timing the market!

Find out more about risk and return