How To Reduce Your Investment Risk

What is Investment Risk?

In the investment world, the term “investment risk” relates to the ups and downs in the value of a stock, bond or mutual fund.  It stands to reason if you are going to invest in a stock, bond or mutual fund you would prefer to do so in such a way that the potential rewards outweigh the potential risks.

Patience and a keen understanding of how you would like to achieve those goals are key in designing your investment portfolio.  You should not only take time to consider the rate of return you wish to achieve but also the investment risk.

Your first concern should be identifying your comfort level followed closely by a specific investment return.  Next, examine your choices and determine a mix of assets that will potentially provide the highest return versus the amount of risk that you are comfortable with.

Reducing investment risk is critical, as it is far easier to lose money than to earn it.  It takes greater effort to recover a lost than it does to incur that loss in the first place.

The easiest way to reduce your risk

 is by investing in assets that offer a guaranteed rate of return.  The downside with this type of investment is that the rate of return is relatively low.  This means that over time the effects of inflation will likely ravage the value of the investment. Quite often investing in risky assets such as stocks and bonds tends to be the most appropriate way of achieving an investment goal.  So it seems that the best way to invest in stocks and bonds without taking on too much risk is by diversifying your assets.

That is why a good investment strategy is important – it will help shrink your risk. 

Proper diversification and asset location is essential.  To identify the percentages of an investment portfolio a process called “Strategic Asset Allocation” is used by professional investment planners. The investment is placed in a variety of simulated investment scenarios to show the potential of the highest rate of return for a given level of risk or lowest risk for a given level of return.  It’s all about finding the balance between the two. Using a strategic asset allocation approach, it is possible to create a balanced portfolio that will not completely remove the risk of financial loss, bit it can help you to build personal wealth without taking undue risk.

Getting the right asset mix can be complex and most investors have busy schedules, and have neither the time, patience nor skill to undertake an in depth analysis. This is why they normally turn to an investment professional.  Your portfolio may contain many combinations depending on your objectives and preferences; they can vary from fixed income securities to domestic to international equities and be further diversified by growth and value management styles. The end result is an investment strategy that is tailored to your comfort level with risk.

Dominic Lombardi is a Consultant with

Investors Group Financial Services Inc.

Phone 1-800-737-1822