Wealth Planner:
Managing that four letter word: RISK

          All investments involve an element of risk, but there are two important points to keep in mind:

  No risk, no return.

  Risk is a fundamental part of the investment equation.

The key to successful investing is not to avoid risk, because by doing so you will also avoid a reasonable return, but rather to sensibly manage the risk.

          The return from your investment is derived from the risk taken by your portfolio. Analysis of long-term returns from cash, bonds, property and equities reveals that the four asset classes are likely to produce the following real returns (after inflation), illustrating that the risk of negative returns are dramatically decreased over time.

Source: The Road to Wealth by Paul Clitheroe/ipac securities

Diversification & Time

          Two important and enduring investment principles, which will help to further manage the risk within your portfolio are diversification and time.

Diversification: True security comes from holding a diverse range of assets. At its simplest level, this means not putting all your eggs in one basket, even though this may produce a higher return in the short term. If you were to invest equally in shares in four companies and one of them did particularly badly, that would adversely affect 25% of your money. If, on the other hand, you had invested in a fund that covered 100 companies equally, the poor performer would only affect 1% of your investment. One of the easiest ways to diversify is through index mutual funds.

Time: Good investments need time. Short term investing can be highly risky but over the longer term it is a different story. Success depends on time in the market i.e. how long your assets remain invested, and not marketing timing.