You may have heard the saying, “No risk, no reward”. But did you know that making incremental investments and diversifying your portfolio over time can mitigate the risk of market volatility and be rewarding in the long haul?
Investing: Risks
When people think about investing, they tend to focus on the potential to receive a great return – the possibility of picking a winning share that will eventually increase in value over time.
Other people focus on the risks of investing in the open market – the possibility of losing everything if things go pear-shaped or if a share losing value.
It’s true that investing in the share market involves some risks, and it is also true that investing is one of the best ways to accumulate wealth over time.
There is an inverse relationship between the potential amount of money you could make and the amount of risk involved in the investment, but there are ways to minimise that risk.
Investing: Compound growth
If there is one thing that can reduce the risk of market volatility in the long term, it is time in the market.
Investing early is a smart move, as you can use the power of compounding to increase your wealth. Compounding refers to the increasing value of an asset due to the income earned on both the principal and accumulated income from the investment.
The sooner you get started, the more money you will have accumulated when you have reached retirement age. Time is on your side; long-term investments are the preferential focus rather than short-term speculation.
Investing: Diversification
Finding that winning stock that will make you millions sounds excellent, but it is impossible to predict which stock is the winner. And if you haven’t selected the winner, you could potentially lose everything.
The problem with trying to identify a single stock that will make a ton of money over the long term is near impossible.
There will always be a risk of losing capital when you invest. The good news is that we can mitigate this risk by investing in different companies in different industries as opposed to one company in one industry.
This is known as “diversification”. Diversifying your investments is an important consideration when investing, as spreading your investments across the different asset classes and industries increases your potential return over time whilst reducing your risk.
Should you require further information in relation to investing, please feel free to contact Peter Quinn by submitting an enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.