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Risk versus reward. Where do you stand?

  • 3 min reading time
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Any investment comes with a certain element of risk – so how much risk are you willing to accept in order to achieve your investment goals?

What you will learn

  • Why there is a relationship between risk and reward
  • What to consider when deciding how much risk you can afford to take
  • How to get the right balance of risk and reward for you

Finding the right balance of risk and reward is vital for any investor. On the one hand, you want your investments to perform well and for your money to work hard. But you also want to carefully manage the potential for your portfolio to go down in value.

So, the question for all investors is this: how can you grow your investments but stay within a level of risk you are comfortable with?.

The nature of risk

Every investment carries some level of risk. But this varies considerably depending on the type of investment.

If you buy shares in a promising start-up, for instance, there is potential for the shares to increase in value substantially – if all goes well. However, they also bring a higher risk of you losing your money if business doesn’t boom.

However, while every investor wants to avoid losing money, if you stick to low-risk investments such as a savings account, there is a greater chance that you will not achieve your investment goals.

Here lies the dilemma. As an investor, you want to earn as much as possible, while taking on as little risk as you can.

What’s your level of risk?

When weighing up these competing goals, it’s important to understand how much risk you want, and can afford, to take. This will be determined by a number of factors, such as your personality, your investment goals and your life stage.

For example, investors who are close to retirement age may be less comfortable with risk than investors who have plenty of time to recover from a significant loss.

To help you understand the level of risk that is right for you, ask yourself these five questions:

Here lies the dilemma. As an investor, you want to earn as much as possible, while taking on as little risk as you can.

  • How comfortable are you with the idea of losing money?
  • How much can you afford to lose?
  • How long would it take you to recover from a loss?
  • For how long can you commit your money?
  • Could you achieve your investment goals using a more cautious approach?

Answer honestly, and you’ll be able to make the right investments decisions for you and your life goals.

Why time is important

And, while there is a clear relationship between risk and reward, there are other ways that you can make your investments work harder, without taking on more risk than you are comfortable with.

For example, you could commit a smaller amount of money to investing, but over a longer time period.

It’s also worth considering that not all of your investments need be equally risky. A diversified portfolio will contain investments of varying types and risk levels. Read more about how you can manage your portfolio here.

Risk notice

Any information provided should not be considered personal advice. Past performance is not a guide to future performance. You may not get back the full amount you invest. If you have any doubts about making your own investment decisions, seek financial advice.

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Risk Explained

Want to learn more about what risk is, the different types of risk and how you can spread your risk?.

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