It is not a secret that it is worthwhile to invest your money; however, the biggest problem with investing is how to do so with minimal risk. We also know that investments with no risk are not only impossible to find, but less worthwhile.
So, how do you measure your risk and find the balance between a good investment and a safe investment – one with enough risk to make it worthwhile, but low enough risk that it’s…. well, not risky?
Shares and Bonds
Shares and bonds are a great place to start if you are looking to grow your money without too much risk.
- When you buy a share you are investing in a company’s ability to increase their profits. If you find a strong company that grows each year, your shares should rise in value and you may even be paid out dividends from the company’s profits. While a strong stable company is not likely to see sudden rises in their share price, they are more likely to pay dividends and you are less likely to lose your money.
- A bond, on the other hand, is a type of debt issued by a government or company and which pays a coupon (like interest) usually twice a year, with a guarantee to pay back your money at the end of a specified period of time. Bonds are considered low risk because while a government or company could default on their payment, it is not likely.
Diversification is important and is one of the best ways to minimize your risks. Holding a mix of shares and bonds will help you to spread your risk over different types of investments. Even so, you should also spread your risk across different types of companies. For example, if all of your portfolio is based on mining and energy companies, then when the price of oil falls, your returns will be affected. You must look at the bigger picture of your portfolio to make sure it is well balanced.
Asset allocation really falls into the same basket as diversification. It requires you to spread your investment across different companies, regions and sectors. The investments with the least risk will be those that find reliable, strong companies in stable markets and regions. Investing in an emerging market or an adventurous company is far more risky.
One popular way to manage and minimize your risk is to invest your money via a fund. They will worry about asset allocation for you. Multi-asset funds hold shares, bonds and other assets, with fund managers who are responsible for finding opportunities for profits by analyzing and responding to market conditions. This will improve diversification of your funds and also put the management of your investment into the hands of a professional who understands the markets and how they may impact your investments. Alternatively, investors can buy passive tracker funds which primarily hold shares and bonds and provide a less risky type of investment, combined with improved diversification.