Saving and investing involves a variety of risks, like, the risk that an institution will fall (default risk), the risk your money will not keep up with rising prices (inflation risk), the risk that comes with share prices going up and down (market volatility risk) and the risk that you could have earned better returns elsewhere (interest-rate risk). However, it is imperative to take into consideration your present situation before making investment decisions.
The trick is to strike a balance between these different risks by asking yourself what you can afford to lose. What kinds of risks do you feel comfortable assuming? If losing capital would have a materially detrimental effect on your standard of living, you have a low capacity for loss, so it would be better to take a lower-risk investment approach.
Also, match asset allocation to your risk appetite. Once you’ve figured out your risk appetite, the next step is to match your portfolio to this. The more money you invest in high-risk assets such as shares, the more growth potential you have – but also the more chance of a capital loss. Those who want to take less risk and, for example, have more money in cash and fixed interest should have a greater level of capital protection.
When you’ve worked out your risk appetite and created a portfolio to match it, you need to review your portfolio at least once a year and adjust it if your circumstances change, e.g. in case of a job loss or promotion. Rebalancing your portfolio is also a good strategy. This involves selling some of the investments that have performed well and now represent a larger proportion of your portfolio and reinvesting the proceeds in investments that have not performed as well and have become a smaller proportion of your portfolio, to get back to your starting position.
To learn more about high-returning investments, check out our other blogs.
This article was written by Rose Ellah Ngari, Chief Executive Officer at Vasili Africa.
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