PLANNING
Why risk is your friend
Risk is a very off-putting word that we tend to associate with negative
outcomes such as loss.
It is important to acknowledge there is a very simple
correlation between risk and return – the lower the
risk, the lower the return and vice versa.
Reducing risk as you near your goal will ensure your
investments don’t fall dramatically at the point you
need to access them.
There are examples of low-return investments that
can be quite risky and very risky investments that do
not offer the potential for outsized returns.
If you don’t plan to buy an annuity at retirement, you
can choose your moment to cash in your investments,
rather than relying on market conditions at that time.
The skill is to find the right balance of
risk and return that suits you and your
investment goals, but lets you sleep
at night.
Key points
There is no point in feeling that you have to take on
a large amount of risk to achieve your goals if it
makes you feel uncomfortable.
When you are younger, you can usually take a little
more risk as you have many years ahead of you to
smooth out the ups and downs of the stock market.
You also have more time to earn and invest should
you lose money in the short term.
Higher risk and higher potential rewards tend
to come hand-in-hand
If you can afford to take a longer-term view
with your money, then the fluctuations tend
to smooth out over time
With no need to cash in your investments at
retirement, you can afford more risk later in life
as you won’t need to sell in a down market
The risk/return hierarchy
Higher potential long-term returns
EQUITIES
BONDS
CASH IN YOUR BANK ACCOUNT
Lower potential short-term risk
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