How to determine risk/return
One of the main reasons people don’t invest their money is the belief that investing is too risky. You might think like this too: Isn’t the market volatile? What if there’s a financial crisis? What if I lose everything…?
Often these fears can be boiled down to a lack of knowledge and a lack of confidence. Take for example the fear that a financial crisis might happen at any time. Of course they do happen, but when a longer term view is applied the perspective shifts. For example, over the past 40 years the Australian property market has grown in value on average by 7.4% per year.
Considering the average savings interest rate is currently just 0.1%, it might be worth rethinking simply sticking your money in the bank.
Weighing up risk is important
All investments will involve some level of risk. In the financial world, risk is defined as the possibility that an investment won’t deliver on its expectation. This includes the chance of losing some or all of the initial investment.
It’s prudent to do your research before blindly investing. You’ll need to understand your own tolerance for risk and invest accordingly. The traditional understanding of financial risk has been the higher the risk, the higher the return. This isn’t always the case, especially if you are able to leverage off the experience and expertise of others.
Here are 3 things to consider when determining the risk/return of an investment:
- Financial literacy
Having clarity on your own numbers and financial situation should always be the starting point. How much can you afford to invest? Are you in a position to invest? What is the best strategy for your circumstances and goals?
A great place to start for this would be to come along to the free Finnia Financial Scorecard monthly workshop. Get full clarity on your current financial position. Register here.
- Do your research
Once you’re clear on what you have to work with, now is the time to investigate opportunities for investing your money. You need to take a close look at the investment numbers. What are the returns? What are the associated costs? What are the outside influencing factors?
- Leverage the experience of others
This is the time to surround yourself with experts. Find out how the professionals are investing their own money. Sure you can go it alone but do you have the experience? Why wouldn’t you want to seek out the help of people who know what they’re doing?
Want your money to work harder for you? We help you determine simple investment strategies for replacing your income. Register now for our free workshop to get clear on your goals and how to achieve them.