Learn how to Balance Risk and Reward - The Share Centre

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Risk versus reward

A calculated risk

As so often in life, when you invest in the stock market it’s a question of striking a balance between risk and return. Driving a car can be risky, but for most of us, the benefit of being able to get from ‘a’ to ‘b’ so conveniently makes it worthwhile. It’s the same with investing, but the beauty is you can choose the level of risk you are comfortable with.

In general, the more risk you are prepared to take, the higher your potential returns. Of course there’s always a chance that you could lose some or all of your money, especially if you choose high risk investments. However, if you follow good practice, there’s no reason why you can’t profit from the stock market like millions of others do every day.

What type of investor are you?

Before you start, decide what type of investor you are: 

  • Cautious  I’m only prepared to take a relatively modest amount of risk and am happy with the potential for profits which counteract inflation.
  • Intermediate  I’m comfortable with a moderate amount of risk which could give me profits over and above inflation, accepting there may be ups and downs along the way.
  • Adventurous  I’m happy to risk my money significantly in order to pursue high profits and am aware that the value of my investments might fluctuate considerably.

Just remember that if you are investing for the long term, you can afford to take more risk because even if you suffer losses or the market takes a temporary dip, your investments have longer to recover. By investing a regular amount each month, you can smooth out any dips in the market since you’ll be buying more when investment prices drop.

How can I help reduce my level of risk?

Diversification – don't put all your eggs in one basket. Spreading your money across various companies and sectors can help reduce your overall level of risk. Be careful however not to spread yourself too thinly, as you may have a hard time keeping up with all your investments if you have too many. 

Another way to achieve diversification is to mix aggressive and defensive investment strategies.An aggressive investment strategy can help you achieve maximum return by building a portfolio that bears a high amount of risk often over a relatively long period. A defensive strategy is a method of portfolio management aimed at minimising risk. Money is invested in shares that are less volatile than average but typically offer a much lower return on the investment.  

Still unsure?

There’s nothing wrong with purchasing relatively low risk investments and then adding more risk to your portfolio as you grow in confidence and experience.

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