Managing investment risk – MMV300
No-one likes the word ‘risk,' except those nutters who throw themselves off mountains in wingsuits. But if you are going to invest, you need to harness risk to gain the returns you want. In this video I cover three ways of managing investment risk.
Managing investment risk
When it comes to managing investment risk, there are three factors primarily at play:
Diversification
This is technical jargon for spreading money around; not keeping all your eggs in one basket. This is common sense of course, but you can diversify your investments in two main ways:
- By asset class – hold different kinds of assets, such as shares, bonds, property, gilts, commodities and many more
- By geography – the whole world is available to investors, and there is plenty of value outside the UK
By spreading your money across different asset classes and geographical areas, you reduce your dependence on just one or two strategies. Chances are if one asset class is not working well, maybe one of your other holdings will balance it out.
Time
It's an old adage that investing success is not down to timing the market, but time in the market. The longer the period you invest over, the lower the impact of short term market fluctuations. If you're investing for 20 years, what do you care what happens over the course of a few weeks or months.
Of course, no-one likes markets dropping, and you need to be especially careful if you are drawing an income from your investments. But for the most part, a key factor in managing investment risk, is time.
Review
Any portfolio left to its own devices will drift. I'll explain.
Let's say you invest £100,000, and place half of your portfolio in shares and the other half in bonds. Then over the first year, the shares double in value to £100,000 and the bonds halve in value to £25,000. You've made money – £25,000 – but now you have a portfolio which is 80% in shares, not 50%, making it a far riskier proposition. If shares subsequently take a dive, you're going to be hit harder than you should.
You should review your portfolio regularly to keep an eye on these shifts and frequently rebalance to get things back into kilter. Either you can do this yourself, or instruct an adviser or investment manager to do it for you.
Three little things make a big difference
None of these strategies is particularly difficult to understand or execute, but together they can help in managing investment risk to within tolerances you are comfortable with, while still giving access to the rewards of real-asset investing.
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