Investing is the key to building wealth and becoming financially secure. That’s because your investments do the hard yards earning a return. No matter whether you’re just starting out in the workforce or fully retired, investment returns provides extra money for living, spending, or to reinvest – all without any physical effort from you.
This can make it tempting to pick investments offering the highest possible return. But it’s not that simple. When it comes to selecting investments, bear in mind that ‘risk equals return’.
Know how you feel about risk
Taking excessive risk in the hope of earning a juicy return is one reason why investors sometimes lose their money. If you come across an investment promising a very high return, don’t throw your money at it. Stop and ask ‘Why?’ It’s almost certain there’s a high degree of risk involved.
That’s not to say risk should be avoided. If you take no risk, you get no return. The real trick is to understand how much risk you are happy to live with and invest accordingly.
Risk varies between investments
Let’s say you want to minimize risk as much as possible. Savings accounts and term deposits are one of the lowest risk investments available. That’s partly because the Commonwealth government guarantees deposits up to $250,000. The flipside is that your money will earn a low return.
You can expect to earn a higher return with investments like shares and property. But always remember the risk/return trade-off.
Shares values can fluctuate wildly at times, and even property values can dip over short periods. That’s why you should be prepared to hold onto these higher return investments for the long term – we’re talking 5-years plus.
Make risk work in favour
The bottom line is to be aware of risk. You can’t – and shouldn’t – avoid risk altogether. By investing in assets with a level of risk you’re comfortable with, and spreading your money across several different types of investments, it is possible to manage risk and make it work in your favour to grow wealth.
As always, it is recommended that you discuss with your financial advisor and accountant before making any investment decisions.