Diversify your risks

In investing, risk refers to uncertainty about future return. The riskier an investment is, the more uncertainty is involved in the return on the investment. The higher the return you are looking for, the higher the variation of the return, i.e. risk, that you must tolerate.

1. Identify your personal risk tolerance

People react to risk in different ways. Think about how much risk you are willing to take.

The best alternative for investors would be a high return with a low risk. Risk and return, however, always go hand in hand: the higher the expected return, the higher the risk.

2. Reduce your risk by dividing your investments into fixed income investments and equities

There is a general perception that profitable investments always call for successful market timing and skilled selection of individual investment objects.

The value variations of different asset classes will balance each other out as the market situation fluctuates. The same outcome is sought with regular saving, where you make a regular investment in both market upswings and downswings. Allocating investments into different asset classes or spreading them out over a period of time is called diversification.

Up to 90 per cent of the differences in the long-term profits of investment portfolios derive from differences in the weighting of asset classes. Therefore the choice of individual securities or timing of individual investments will not have a significant impact on the long-term return on a diversified investment portfolio. Your most important investment decision is the choice of the asset class weighting.

3. Diversify effectively

Even small investments can be diversified effectively by investing in investment funds or investment bonds. These also enable you to have a global diversification in your portfolio.

4. Monitor your investments regularly

If you are a long-term saver, you do not need to change the diversification you have chosen due to short-term fluctuations on the market. Rises and falls in prices will, however, alter your portfolio’s diversification in the course of time.

It is worthwhile to regularly check the allocation of your different investments and adjust the weightings of the fixed income and equity investments to your own targets. This rebalancing will steer you to sell shares when their prices are high and to buy when their prices are low.