Investment risk strategies
EVERY investment involves some level of risk.
The greater the potential reward, the greater the risk. However, the greater risk does not necessarily translate into greater potential reward. Sometimes greater risk is just greater risk with little potential reward.
Risk is not a bad thing, but you need to understand what kind of risks you are willing to take with your investment and how to reduce unacceptable levels of risk.
This week we shall focus on the following strategies to help minimise investment risks:
Asset allocation: This is the way in which assets are distributed within your portfolio to align with your goals and objectives as an investor.
Although there may be many investment products in the market, it is the asset allocation rather than the actual investment of products which differentiates high returns from low returns and will enable you to reduce the risks involved with investing.
The primary goal of strategic asset allocation is to create an asset mix that seeks to provide the optimal balance between expected risk and return for a long- term investment horizon.
All asset classes have a different degree of risk and returns. When it comes to asset allocation, the major asset classes that most investors may prefer are stocks, bonds, cash and commodities.
Portfolio diversification: Overall risk can be reduced by investing in several different uncorrelated securities.
To minimise risks and boost potential returns, always invest according to your investor profile in different product types, asset classes and industry sectors.
This helps in managing systematic risk as different categories of investments respond to changing economic and political conditions in different ways.
By including different asset classes in your portfolio, you increase the probability that some of your investments will provide satisfactory returns even if others are f lat or losing value.
A balanced portfolio should include several asset classes to reduce the risk of a downturn in one sector.