What does taking risk mean when it comes to your money?
The last few months have been a bit bumpy – navigating your way through a global pandemic can certainly make you feel overly cautious in different areas of your life. Perhaps about gathering with friends, attending events or bigger concerns about the security of your home, employment or business.
Given that general feeling of caution, we thought it would be a good time to dig a little deeper on what we mean by risk and how it impacts your investments.
You might think it’s a natural instinct to minimise unnecessary risks. But it’s not uncommon to come across investors who are making risky decisions because they think it will make them more money.
That logic isn’t necessarily wrong – risk and return are related, it’s one of our guiding principles – you can read more on that here. The real question is whether you need to take the risk at all. Check out this video from Kenneth French, renowned Professor of Finance, to hear about what risk means in relation to your money:
So, it’s all about how much you think you’re going to spend over your lifetime. If you don’t have enough money to cover those costs you might take more risks with your investments over the long-term. But if you do have enough, why would you put yourself in a risky position?
You might now be thinking ‘I don’t know how much is enough’; that’s where a holistic financial plan comes in. One that takes into account your lifestyle and ambitions, and plots your path down to the penny.
If you’re considering taking more risk to recoup money you’ve lost in recent months, or you don’t really understand how much risk you should be taking, get in touch – we’re more than happy to help.
Video credit: Dimensional Fund Advisers
Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.