One thing is certain over the course of my career within the international wealth management arena, I have met many types of investors – and, based on our conversations, I can quite confidently say that almost half of investors don’t know exactly how their investments are allocated and the risks associated with those allocations.
In general, risk can be defined as the possibility of sustaining a temporary or permanent loss. This certainly applies in the world of investing. Investments that are labelled high risk, for instance, have a significant possibility of experiencing large swings in their investment performance. On the other hand, low risk investments traditionally have less risk, but they often will not generate significant investment performance. However, it’s important to note that low risk investments are NOT immune to market downturn.
As individuals, we all have different views to investing; what’s right for one investor may not suit another. So, just because your neighbour or cousin uses a certain investment strategy, it doesn’t mean that you should do the same in your own investment selections.
Each investor will have a different tolerance for risk, which will change throughout our lifetime and must align with our own individual goals. For example, if an investor needs cash within a short period of time, they should not put their money into higher risk investments. However, someone who doesn’t need access to their money quite so soon can choose investments that offer the best possibility of generating long-term positive results such as high risk investments – the longer timeframe can offer an investment a chance to grow. Plus, if any market wobbles occur, they should be smoothed over by long-term investment gains.
If you are not sure what your risk tolerance is; click and fill out the ‘Investment Quiz’ below:
As the most successful investors will tell you, diversification is key. Many investors understand the principles of diversification and risk well enough to know that it’s unwise to put all of their eggs in one basket. In practice, however, they may not always know how to avoid this. A diversified investment portfolio not only reduces unwanted risk, it can also contribute to long-term investment growth. It’s important to note that having a broadly diversified portfolio doesn’t necessarily mean a second investment; it can also mean diversifying into different classes of assets.
As an investor, you should always do your homework and never invest in anything that you don’t understand. This requires taking the time to learn and pay attention to events that might affect you – you work hard for your money, so it’s equally important to work hard to understand how to make the most out of your investments.
Finally, it’s imperative that you always read the fine print. Make sure you understand the restrictions and fees associated with your investments and ask questions such as:
- Is there a minimum level at which you can invest?
- Is there a cost associated with buying into the fund (front-end load) or leaving the fund (back-end load)?
- Is there a minimum time commitment (i.e., locked in) period?
- What’s the penalty for making withdrawals outside of that timeframe?
- How will the investment adviser be compensated? Are they paid a salary, a commission, or a combination of both?
There is no golden rule to investing and there are no right or wrong answers. However, there are two crucial questions you must always ask yourself:
- Do I understand what I am investing in?
- Do I understand the risks associated with my investment?
Once you can confidently answer “yes” to both of these, you will be well on your way to understanding how your investments are allocated and the risks associated with those allocations.