To be a smart investor, you should understand what kind of risk is involved and its implications. These may include:

Inflation Risk

Inflation causes money to decrease in value at some rate, regardless of whether the money is invested or not. As investments are generally long-term in nature, one of the biggest risks for investors is inflation risk. Your savings or money will lose value if they do not earn enough to stay ahead of inflation.

Tips: If your investment cannot give you a higher-than-inflation return, your money is losing value over time.

Investment Risk

Generally speaking, due to market volatility and other external factors, your actual investment return may deviate from the expected outcome. This refers to investment risk. Smart investment is partly about risk management. To maintain a balance between investment risk and return, your portfolio should feature basic asset allocation in a way that suits your needs. Investments with higher potential returns entail a greater risk of losing money, but this can be balanced in a long-term investment plan.

Tips: If you take out high risk investments only to be consumed by anxiety, you have chosen the wrong level of risk, so it is important to analyse your risk tolerance level.

There are a number of ways investors can manage or reduce risks, including diversification and dollar cost averaging.

Diversification

As the old saying goes, “don’t put all your eggs in one basket”. Diversification is the spreading of your investment across a number of different assets to help reduce the overall investment risks. In a diversified portfolio, the negative results of some investments will be offset by the positive returns of others, thereby leading to higher returns and posing a lower risk than any individual investment.

Tips: In general, there are two ways of diversifying your portfolio, which involve spreading your investments among:

(i) Asset classes – cash, bonds and equities
(ii) Markets – geographic regions, countries/locations, sectors and currencies

The Power of Dollar Cost Averaging

Dollar cost averaging is a technique designed to reduce market risk through regular investments at predetermined intervals and set amounts over time. By buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price, investors can purchase more shares when prices are low and fewer shares when prices are high. Consequently, the impact of short-term market fluctuations on an investment can be mitigated and the costs of units purchased are averaged out.

Tips: Under dollar-cost-averaging, you do not have to time the market. By investing on a monthly basis, you can may enjoy the following benefits: