Balancing risk and reward
Your attitude to risk can make a big difference to your profits.
When you invest in the stock market, you need to strike a balance between risk and reward. In general, the more risk you are prepared to take, the higher your potential returns (or losses!).
However, the beauty is that you can choose the level of risk you are comfortable with. There’s always a chance that your investments may fall in value, but if you’re in it for the long term, they’ll have longer to recover.
What type of investor are you?
Before you get started, decide what type of investor you are. This will help you decide which types of investment you are comfortable owning.
I’m only prepared to take a relatively modest amount of risk and am happy with the potential for profits which only keep up with inflation.
I’m comfortable with a moderate amount of risk which could give me profits over and above inflation, accepting there may be ups and downs along the way.
I’m happy to risk my money significantly in order to pursue high profits and am aware that the value of my investments might fluctuate considerably.
How to reduce risk
Don't put all your eggs in one basket. Spreading your money across various companies, sectors, regions and investment types can help reduce your overall level of risk.
Combine an aggressive investment strategy, which aims for maximum returns through high-risk investments, with a defensive strategy, which minimises risk by investing in less volatile shares that typically offer lower returns.
Invest regularly rather than all at once
Monthly investing is an alternative to investing a lump sum. It can smooth out fluctuations in share price - buying more shares when prices are low and less when prices are high.
There’s nothing wrong with purchasing low-risk investments and then adding more risk to your portfolio as you grow in confidence and experience.
These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The value of your investments, and the income derived from them, may go down as well as up. If in doubt, please seek advice from a qualified investment adviser.