5 min read I Date: 20 December 2022
If you’ve been thinking about investing your money, you would’ve pondered the potential risk, which is one of the most important factors to consider before you start. For a first-time investor, investment risks can appear intimidating. Knowing how to manage your risk tolerance when you invest is a valuable skill. It will help you make strategic decisions so that you can choose investments that work in your favour.
So, what do you need to know about investment risk to manage your investments better?
Identify the Types of Risk Present in Your Investment
Investment risk is the degree of unpredictability and potential loss associated with an investment. This unpredictability is dependent on many factors including stock market movements, the economy and the length of your investment. The kind of investment risk you are up against will vary according to the kind of investment being made.
The most general types of investment risk that exist are:
- Inflation risk
- Longevity risk
- Market risk
- Interest rate risk
- Credit risk
Understand Your Personal Risk Profile
You can gauge how much risk you are willing to take in your investments by determining the following: :
- Risk appetite
- Risk capacity
- Risk tolerance
- Risk composure
How much loss are you willing to tolerate in exchange for potentially higher returns from your investment?
Everyone has a different risk tolerance, based on their investment objectives. Your investment plan should be drawn up based on your income, financial goals, needs and lifestyle and should follow a realistic schedule. As with your investment plan, your personal risk profile needs to be reviewed regularly due to ever-changing market trends that may impact your investment portfolio with time.
You also may find that having a conservative risk profile as you approach the end of your investment is required, as you will have less time to recover from short-term market drops. At this point, preserving the value of your investment becomes a higher priority than making higher returns.
Further along in your investment plan, you may find that having a more conservative risk profile serves as a better strategy. Towards the end of your investment, sustaining its value becomes a higher priority than maximising your potential returns. A conservative approach is necessary to recover from short-term market drops.
Building A Risk-Resilient Investment Plan
The best way to manage risks and curb losses in your investment is to plan them accordingly. Do this by identifying where they may be most prevalent in your investment plan and making decisions as you go along. As an example, investors should consider building a dynamic investment portfolio that consist a range of uncorrelated assets to hedge against different part of the volatility. For instance, when market is uncertain, investors tend to hold more safe heaven asset (fixed income) and reduce their exposure to risk assets (equity). A possible way to manage risks and curb losses in your investment is to be mindful of them when drawing up your plan. With every decision you make for your investment strategy, your risk appetite, tolerance, capacity and composure should be taken into consideration.
Doing so facilitates a risk profile that is aligned with your strategy. This means that your approach to your investment risk is head-on. By identifying the risks that are present in every step of your investment planning, you can address these risks with contingency plans that will safeguard your investments. For example, you may find that setting up an emergency fund facilitates your investment plan by allowing you to be a bit less conservative in terms of risk as you can make amends to counter any losses you may face.
Otherwise, you may consider diversifying your investments when you feel you want to try a strategy that involves higher risk but is also conservative in other areas of your investment to compensate for any potential losses. Risk is present in any investment and varies according to the type of investment. Learning about investment risk can help you decide the kind of investments that work best for your financial goals and allow you to manage your investments along with the risks that come along with them, better.
Don’t let the fear of investment risks deter you from growing your wealth. Learning about it allows you to decide how much of it you are willing to take in your investment in relation to its potential return. With time and consistency, you will grow into a more confident investor with a better understanding of investment risk and the right skills to approach it.
What to do next?
- If you need any investment assistance, please get in touch with your financial consultant. (We can help you find one). They can assist you with your investment goals and advice you on your risk tolerance.
- Alternatively, you can also manage your portfolio on-the-go, anytime, anywhere via our online investment portal.
- If you need further assistance, please leave your details here, and we will connect with you.
Please be advised that investment in the relevant unit trust funds, wholesale funds and/ or private retirement scheme carry risk. An outline of the various risk involved are described in the relevant Prospectus, Information Memorandum and/or Disclosure Document. You are advised to read and understand the relevant Prospectus, Information Memorandum and/or Disclosure Document including any supplemental thereof and the Product Highlight Sheet (if any) before Investing. As an investor you should make your own risk assessment and seek professional advice, where necessary. Among others, you should consider the fees and charges involved. The registration of the relevant Prospectus, Information Memorandum and/or Disclosure Document including any supplemental thereof and the Product Highlight Sheet (if any) with the Securities Commission Malaysia (SC) does not amount to nor indicate that the SC recommends or endorses the funds. A copy of the relevant Prospectus, Information Memorandum and/or Disclosure Document including any supplemental thereof and the Product Highlight Sheet (if any) may be obtained at our offices, distributors or our website at www.principal.com.my. The issuance of any units to which the relevant Prospectus, Information Memorandum and/or Disclosure Document relates will only be made on receipt of an application referred to in and accompanying a copy of the relevant Prospectus, Information Memorandum and/or Disclosure Document. Securities Commission Malaysia does not review advertisements produced by Principal.