Any investment involves risk – that is, essentially, what investors are paid for. As it can’t be avoided, the art of successful investment lies in how you manage it. Take too many risks and you will lose all your money. Take too few and you won’t make very much. In the middle is the sweet spot. There’s no simple formula for how to reach it because the nature of the risks involved varies by sector and the appropriate level of risk will depend on your personal circumstances, but it is possible to work out what’s right for you over time. In the interim, there are rational ways that you can increase your chances of getting it right most of the time.
The importance of a balanced portfolio
As you engage with the world of investment, you’ll hear a lot about the importance of having a balanced portfolio. Basically, this means mixing high-risk and low-risk assets so that you have a good measure of security but also the opportunity to turn a healthy profit. Often, it also involves spreading assets across multiple sectors or multiple countries in order to reduce the risk associated with economic problems. It’s easier to balance a portfolio if you intend to keep it for a long period of time as this makes it possible to incorporate slow-ripening investments, which offer high rewards in comparison to most lower-risk assets because of the security they provide to the companies benefiting from your money in the meantime. Long-term government bonds can also be a good option for providing stability; though they’re not always as profitable, they have the secondary effect of adding stability to the national economy on which your business inevitably depends.
Different balancing strategies
There are different ways you can approach balancing your portfolio. Some investors balance higher-risk options with very stable, low-risk ones, while others prefer a mix of medium-risk assets. As a rule, the former strategy is best for the small investor, while the latter suits those who have more money to spend, simply because they are able to purchase a greater number of assets and can therefore more effectively diversify them and minimize the risk of having too many failures. It’s important to find an approach that you feel personally comfortable with because if you’re nervous about your investments, you’re more likely to make bad decisions. You may also wish to factor in your age, because when you’re younger, you’re likely to have more flexibility with regard to generating income, so you can afford to take more risks, whereas when you’re older, you’re likely to depend more on income from your investments, so you will need more stability.
The cautious investor
It’s possible to get a misleading impression of how the professionals approach investment when you read about them in the media, simply because more sensational stories make better press. It’s also the case that there has, in recent decades, been something of a culture of risk – many see this as the underlying reason for the global economic crash. One man who has always spoken out against the notion that a business can be “too big to fail” is Warren Stephens, CEO of Stephens Capital Partners, who sees the first rule of investment as avoiding any risk that could jeopardize a company’s survival. He specializes in the oil and gas sector, where his cautious approach has helped him to ride out market turbulence and ensure the steady growth of his assets.
Taking control of risk
Despite what they might claim, a lot of investors who adopt risky strategies are actually attracted to them for emotional reasons. There’s no denying the appeal of risk – it can give you quite a rush to take a chance and have things work out. More dangerously, success of this sort can give you a false sense of control. Real control comes from recognizing how your emotions affect your investment choices, and distinguishing intuition based on experience from impulses driven by adrenaline. You can get into good habits by holding back and tracking what would have happened if you had invested, then seeing how many times you would have done well compared to the number of times it would have gone wrong, and comparing the money you could have gained and lost. The more times you do this, the better you will get at fine-tuning your decision making.
Risk can be tempting and it can be intimidating. Sometimes, it develops unexpectedly, and if you make a lot of investments, then there will be times when you get your fingers burnt. This does not mean, however, that it can’t be managed, and in the end, that’s what investment is all about.