Managing investment risk – Know your risk appetite and learn 3 basic investment strategies you can use when investing: diversification, asset allocation and dollar-cost averaging.
Key takeaways
- To manage risk, you should invest in a diversified portfolio of different investments.
- You should allocate your capital to different asset classes according to your desired risk-return profile.
- Dollar-cost averaging removes the risk of timing the market wrongly.
Know your risk appetite and learn 3 basic investment strategies you can use when investing: diversification, asset allocation and dollar-cost averaging.
Key takeaways
- To manage risk, you should invest in a diversified portfolio of different investments.
- You should allocate your capital to different asset classes according to your desired risk-return profile.
- Dollar-cost averaging removes the risk of timing the market wrongly.
Know your risk appetite
Managing investment risk – Can you afford to lose all of your investment?
Know your risk appetite and learn 3 basic investment strategies you can use when investing: diversification, asset allocation and dollar-cost averaging.
Key takeaways
- To manage risk, you should invest in a diversified portfolio of different investments.
- You should allocate your capital to different asset classes according to your desired risk-return profile.
- Dollar-cost averaging removes the risk of timing the market wrongly.
Know your risk appetite
Can you afford to lose all of your investment?
Every investment bears risk. In some cases, you could lose some or all of the money you invested. In other cases, you may have to bear market price fluctuation. Then, there are cases where you lose income or return on investment.
Your willingness to accept risk should take into account:
- Your current and future commitments. If you have immediate needs, you should invest in liquid and low-risk assets such as Singapore Savings Bonds.
- Your investment horizon. The longer your investment horizon, the more time you have to ride out market fluctuations and grow your investment.
- How much investment capital you can afford to lose. If your investment suffers a loss, consider how it will impact your commitments, such as loan repayments and your future goals.
As all investments carry risk, you should consider the risk-return tradeoff before deciding on an investment. Generally, the higher the potential returns, the greater the risk.
Tip
Your risk appetite is more about how much you can afford to lose rather than how much you want to make. Try this risk tolerance questionnaire from the CPF board to determine your risk profile.
Risk-return trade-off
The higher the potential returns, the higher the risks.
For example, if you were to invest in futures, you might expect high returns, but at the same time need to be prepared for the high level of risk involved. The question to ask yourself is, “Can I afford to lose a significant amount, or even all of my money?”
Managing risk
All investments involve some measure of risk. You can use these 3 investment strategies to help you manage risk:
Asset allocation
Deciding how to distribute your investments is part of the asset allocation strategy.
Dollar-cost averaging
Market conditions are hard to predict. Trying to buy low and sell high can be challenging, and most investors fail to sustain any significant returns this way.
Read more at Money Sense here
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