Understanding Risk & Reward

Overview

It’s human nature to want the best rate of return possible, but in reality, we always have to keep in mind that the greater the returns, the higher the risks which is why getting the right mix of assets is a must. And you can do that by following an old familiar idea-Don’t put all your eggs in one basket. Asset Allocation & Diversification are the two main principles that can help build the right mix.

Asset Allocation just means diversifying your money into a range of investment types to help manage your risk-typically cash, bonds & equities.

Diversification means spreading your money within each of those investment types to ensure that your portfolio is not dependent on the performance of any one investment.

Allocate

The very First Step to investing is to have a financial goal. Is it a home you are investing for? Or retirement?

We are all very different individuals with our own personal circumstances. And so the next step is to establish the type of investor you are.,for instance, would you say that your approach is cautious or bold or do you think you’ll fall somewhere in between?

You could consider aggressive options for longer term goals & conservative options for more immediate needs.

How your timescale affects your interval decisions.

25 yearxs to go: Emphasis on equities for the potential of longterm capital growth.

10 years to go: Portfolio could get a bit conservative to consolidate some of gains.Part of the money stays in equities ,part moves into lower-risk bond investments

5 years to go: Aim to preserve any gains made.Lay emphasis on lower risk bond & cash investments.

Diversification

Understanding the importance of diversification. Bear in mind that few people choose just one investment.Most investors diversify or choose a variety of investments. The benefit is that you are less likely to lose out if one type of investment does badly. You also have more chance of benefiting from investments that do well.