Striking a Balance Between Risk and Return
Finding the perfect balance between risk and return is a bit of a misnomer. There is no perfect balance, really; if there was, it wouldn’t be called risk, and there would be no financial rewards.
But this does not mean that a good balance can’t be found and indeed, finding the reward within the risk is what clever investing is all about.
So how do shrewd investors strike that balance?
Unfortunately, there is no hard and fast rule, because that equilibrium is largely unique and personal to each individual. Some prefer to take the high risk with the chance of proportionally high returns, while others prefer a steady and more “certain” return, minimising their risk.
No matter the type of investor, there are certain considerations to bear in mind when investing that will help to potentially bridge the gap between risk and return without lessening the financial rewards:
As the saying goes, “don’t put all of your eggs into one basket.” It’s a cliché now, but that doesn’t mean it’s not as true as ever. Diversifying investments holds a number of advantages, the most notable of which are to potentially reduce risk and smooth returns.
It’s important for an individual to regularly review why he/she is investing in specific investments within their portfolio. Not only will this help to determine what level of risk the individual is comfortable with, but it will also help to evaluate stocks to ensure that the risk/return balance remains stable.
A distinction can be made between an individual who is passively living off their returns and one looking to grow their wealth, so this will certainly affect how he/she sees risk versus return. A conservative approach may be more suitable for those living off returns because, if investments dip, income is threatened. Likewise, an effort to grow wealth can often afford more opportunity to invest more aggressively.
Finally, an investor needs to evaluate their own personal level of comfort with their risk/return strategy. While strong emotions should be kept out of investing, an investor needs to feel at ease with the risk they are taking on.
Carrick Wealth is a registered financial services provider, and we specialise in offering our clients attentive and carefully considered investment services. When working with Carrick, you are an individual, and your hard-earned money is important to us. Contact us today to receive our prudent retirement and investment services.