The amount of risk involved with an investment can be managed by matching it appropriately with the length of time you have available to invest, your tolerance towards fluctuations in returns and your investment time frame.
For example, if you are saving for a house deposit and have only 12 months to go before you reach your goal, you would probably be unwilling to risk losing any of that money. If so, it would make sense to avoid growth investments and consider defensive investments instead.
All investments involve some level of risk. Even if you choose the least risky investment, cash, there is still a risk of inflation eroding the value of your capital or falling interest rates reducing the level of your return.
It can be tempting, particularly for retirees, to use defensive investments exclusively when you’re worried about maintaining the security of your capital over a long period. However, unless you include a proportion of growth investments, you could find that five or 10 years down the track you are struggling to make your income stretch as far as it once did.
Apart from considering your investment time frame, another effective way to manage investment risk is to consider spreading your money across various types of investments rather than relying on just one type of investment to meet your goals. This is called diversification.
Investing can be complex, our role is to understand what is right for you in light of your own circumstances and future plans. If your circumstances change in any way it is really important that you let us know so that we can, if appropriate and following consultation with you, amend your financial plan accordingly.