Find out how much risk you're comfortable with
Risk and reward is the classic investor’s balancing act.
The higher the risk we take, the higher returns we could receive, but the more chance we have of our investments losing value, fluctuating in value, or failing entirely.
With a low-risk investment, we generally know the return we will receive right up front. A bank savings account is a low-risk investment. We know the return (the interest rate), but compared to riskier investments, like shares, it isn't very high.
Higher returns are only available with higher risk. The risks come in two types:
- Volatility: The possibility that the value of the investment will go up and down.
- Performance: The possibility that the investment could fail and we lose all or part of our money – or the investment gives us a lower return than expected or needed.
If considering high-risk investments, be sure to balance the risks with other investments in lower risk areas (like short-term deposits, or cash and bonds).
Generally, it’s easy to recognise high-risk investments because the potential returns also stand out as really high. The promise of too-good-to-be-true returns is probably just that: not true.