Risk affects us at all levels and stages of our lives, and can be managed with common sense, intuition, previous experience as well as obtained foundation information. When it comes to financial affairs, recognising, assessing and managing risk is essential on the road to gain peace of mind, profit and reward.
A young couple with kids and a mortgaged home need to be on the ball in ensuring their own life’s jigsaw is properly managed, so all angles are protected and secure. Insurance can play a major part in sorting the bottom line, with the mortgage loan covered by life insurance on the payee, and properly structured with named beneficiaries to cover this major exposure to risk in the event of death, or even serious illness, when the payee cannot work to cover the costs of family life in general.
As life progresses and assets build up, financial investment opportunities present themselves with cash built up over and above life’s normal needs. Risk then becomes an important consideration, and the purpose of investments becomes the gaining of financial rewards. This may be in order to build up a future replacement income with an accumulated substantial lump sum, or to cover school and college expenses of the family kids, or a holiday home, or even a world tour for a year or three away from the routine of a regular job.
There are many levels of risk that are often interrelated and can affect the intended plan focused on reward. These might include political risk, business risk, or market risk, as well as economic and financial risks.
At the beginning of the day risk must be managed so as to ensure that at the end of the day the rewards are forthcoming.
It is essential to assess your own preparedness prior to investing hard earned cash. Time is a primary consideration, and an essential element in determining where you are going to invest your money. Needless to say, if you are putting money aside in order to purchase a property in a couple of years, it is going to be a priority to invest in something which is not exposed to risk of loss of capital. A simple deposit in something that gives a set annual interest or dividend, or a guaranteed return, will be an obvious choice. Going into equities in an exposed market would be a high risk factor, and might end up in substantial losses if the markets tank and prices plummet.
Time will tell, and equity investments should be made with ‘time’ a major consideration, since the longer the period one is prepared to leave your cash invested will determine the levels of risk you are prepared to make. Generally, fund managers in equities like to tell their investors to go for equities if you have a minimum three year time period when you will not touch your holdings, but preferably recommend five years or longer. There are umpteen stories of success over ten year investment periods.
The fact is that there are thousands of choices to make in the market place, and the investor must feel competent in realising the risk and reward levels involved. Nine times out of ten the individual investor is better off selecting a fund management company who are experienced professionals and spend all their time focused on their chosen underlying investments.
If you are not confident in choosing a fund manager or making your own decisions for exposing yourself in the market place, then stick to savings and cheque accounts. Term deposits are next up the ladder of risk, alongside investment in one’s own home or long term retirement plans. Next up the ladder come managed equity funds, managed property funds, and so-called ‘blue chip’ shares. Pandora’s Box gets exciting and up-scale with the purchase of gold bullion, and speculative shares and property. Then you can throw caution to the wind and invest in gemstones, collectables, like art works, or swim in venture capital purchase pools. At the top of the high risk scales there are the potential massive profits to be had with futures and options ….but guess what, these can also cause your cash to crash and burn!
The spread of your holdings across a wide range is a common practice, and a chit chat with a recognised professional independent advisor is a good start to get you feeling comfortable on the investment paths which are full of risk.
When the time comes that you feel confident, having weighed up ALL the possibilities and opportunities, you should see a clear road ahead and rev up your available cash stocks, choose your defined financial investments, and amble on down the super highway destined for high rewards and financial independence.
Risk; don’t be scared of it or covet it… just recognize it and factor it into your investments.