You may have heard the term “risk-free return,” but there’s no such thing – even when it comes to relatively safe options like treasury bonds. That’s not just the case for “right now,” but the way that risk and investment works. Beyond market fluctuations, risks may include changes in government policy, changes in consumer tastes, interest rate changes and currency risk (when foreign exchange rates change).
Different people have different tolerance levels when it comes to risk; depending on their personality, current financial situation, number of dependents and a variety of other factors. Some people are willing to risk a lot to earn big, but this mentality only works when the person has accurate information about the outcome or is willing and able to wear a loss. Otherwise this type of risk adherence can be seen as little more than gambling.
On the other hand are people who are so risk adverse they would rather hide their money under their mattress than risk losing any money by investing it. Most likely these people will miss out on the long term value and returns that investing brings. Risk not only comes from the type of investment but also comes from not being educated about what you are doing.
It’s important to not just ‘dump’ money into investments but to regularly measure their progress and see if the funds could be better invested somewhere else. Admittedly, there will be challenges and failures along the way. You will be hard pressed to find a millionaire who has not had some poor investments – either with low returns or complete failures. But the smart ones will have protected themselves from exposure to great risks and diversified their assets to optimise their risk/return results.
Here are some ways to reduce risk while still enhancing your ability to get large returns:
Plan Your Financial Future
The most important thing you can do for yourself today is to dedicate time to planning your personal finances. Start with gauging your risk tolerance so that you can adequately manage your exposure. You need to treat your personal finances and investments like a business, and this means investing careful time and attention into strategic planning.
Stick To A Proven Strategy
Following a proven strategy will give you more predictable results and better outcomes when investing. You should seek expert advice and also try to model your attitude to personal finances on successful investors who you admire and also whose life style appeals to you.
Insurance is the number one way to protect your physical assets. You should not contemplate owning a house, car, boat etc if you are not able to pay for adequate insurance on it.
Formalise Informal Partnerships
A partnership means the other person’s decisions and actions can affect your wealth and investments. Business partnerships and even marriages are sources of risk when things go sour and the assets need to be split up. Furthermore, a lawsuit against your business partner or spouse can put your assets at risk. To protect yourself, review all jointly held accounts and consider keeping assets separate.
Invest In Your Team
Surround yourself with an intelligent and experienced team – that is your advisors, accountants, broker, and investment strategist. This way you have the best chance of predicting fluctuations and staying on top of your investment choices.
Have Buffers In Place
Markets experience booms and recessions, and although cyclical they are often hard to predict and can have catastrophic consequences. You need to have financial buffers in place for when times get tough – that means savings and low risk assets. Another sound way to protect yourself is to own your own home. This way you will not be at the mercy of rising rent prices.
Want to live the life you really want? The team at Infinite Wealth can provide the education, direction and on-going support you need to reach your financial goals. Get in touch with us today on 08 9438 6333 or click here to contact us.
The information provided is of a general nature and is not intended to be constituted as financial advice. We recommend that you seek independent advice from qualified professionals before employing any strategies outlined.