Risk can be a scary-sounding word. Some people like to take risks in life while others try hard to avoid them. It is the same when it comes to investing: some people are comfortable assuming stock market risk in their portfolio, while others are more conservative (what we often call “risk averse”).
Fortunately, risk is not the scary sounding word many people believe it to be!
What exactly is “risk”? To put it plainly, it is the chance that you will lose something. Almost everything in life involves some element of risk. During a normal day you might risk losing some money, your car keys, a friend, a game…in other words, just about everything we do has potential consequences. However, this is not necessarily a bad thing, because along with the risks of any action should come the potential for reward – hopefully very beneficial rewards!
When it comes to investing (and, if you think about it, pretty much everything else in life) the keys to managing risk are:
- Making sure you are taking the right amount of risk to suit your personal comfort level and circumstances, and
- Making sure you are being compensated for taking risk through the potential for an appropriate reward.
Balancing risk and reward is one of the most important concepts in all of finance. It is also very important when it comes to building your financial future.
Being a successful investor does not mean avoiding all risk, but rather assuming the right kinds of risk exposures within your portfolio and maximizing the potential for reward (in the form of investment returns) given the level of risk you are willing to take.
As we often tell our friends, family and clients – risk and return are related!