How Much Risk Should I Take As An Investor?

One thing that all investors know is how risk and reward go hand in hand. The bigger the risks you take, the bigger the potential payoff when things work out in your favour. This is the basics of investor behavior. At the same time, taking bigger risks also opens the door to potential disaster. The more you put on the line with any given investment decision, the more you stand to lose if things go south.

Truth is, it is difficult to pigeonhole investors into any number of brackets, as personalities, preferences and approaches to risk are always unique; what one investor considers a low-risk approach could be considered downright suicidal by another. When it comes to first-time investors familiarising themselves with the sector, risk can be simplified when considered in the form of three basic profiles; low risk, moderate risk and high risk, three basic starting points to explore your own risk appetite. Understanding these is key to track your investments. While these may be fairly vague generalisations, they can nonetheless be useful in figuring out the level of risk you are willing to take as a new investor.

Low Risk

Investors within the low-risk bracket are those unable or unwilling to invest a great deal of time or effort into their portfolios. Instead, what they want is to generate stable cash flow as quickly as possible, perhaps to boost their pension savings when entering retirement. A sum of on-hand capital is available to transform into an income stream, but under no circumstances should be jeopardised with a risky investment. Buy-to-let property investments are one of the most popular options for investors within this bracket.

Purchasing modest residential properties and letting them out to generate monthly income can result in annual yields of anything from 6% to 10%. Far from a fortune, but nonetheless the kind of regular and consistent income this type of investor prefers. Purchasing residential properties and selling them at a later date to make bigger profits is not a priority, given the time it takes for capital appreciation to generate meaningful gains.

Medium Risk

One of the biggest differences within the medium financial risk management bracket is the way in which this type of investor tends to begin building a portfolio at an earlier stage. An example would be the professionals in the mid-stages of their career with a robust regular income that can channel some of this money into stocks, shares and other longer-term investments. The portfolio of the medium-risk investor can be engineered to strategically balance immediate yields and capital appreciation; investments that both contribute to their regular income and build towards significant profits long term.

A popular example of which would be the purchase of a rundown property with the goal of refurbishing it and then letting it out to tenants to generate reliable rental yields and selling it at a later date to capitalise on its higher market value. A medium-risk investor is also likely to have a more diversified portfolio compared to their lower risk counterparts. This can also be where it becomes helpful to enlist the services of experienced advisers to help manage their portfolios.

High Risk

High-risk investors are those in a suitable position to put significant sums of money on the line in the hopes of generating the highest possible returns. They have sufficient assets and on-hand capital to cope with the kinds of losses that would be insurmountable for lower-risk investors. The portfolio of the higher risk investor will typically be highly diverse, often overseen by one or more skilled advisers.

Investors may put their money into extensive property development projects, invest their money into fixed rate bonds, back companies with sizeable stock purchases or trade currency pairs. There is also a growing contingency of high-risk investors placing a high amount of faith in the fledgling crypto currency market. High-risk investors risk the greatest losses, but also benefit from the biggest gains when the right decisions are made. This is rarely the risk approach to investments for newcomers, who are unlikely to have the sizeable capital reserves available to weather the potential losses.

Blurred Lines

Rather than fitting perfectly within one of the above brackets, many investors blur the boundaries between two or even three categories. It depends entirely on their objectives, priorities and financial circumstances at the time. Newcomers looking to get their investment portfolios off the ground should consider expert broker support mandatory. If you don’t already have one, you should understand how to find a broker. This can be useful in assessing things like available budget, long-term financial health and the viability/appropriateness of the different types of investments available. For more information on any of the above or to discuss your own investment objectives in more detail, contact our team anytime for an obligation-free consultation.

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