5 minute read

Returns are concrete and simple: a number that shows how much your investment has earned. Risk, meanwhile, is more elusive and often overlooked. And it isn’t one-size-fits-all – what feels risky to one investor may seem secure to another, and the same investment can carry different risks depending on the time and environment.

How can you reduce risk?

The first step is recognising it. When you’re thinking of an investment’s potential returns, check for its risk: how likely it is to deviate from those expected returns and what the biggest loss could be. Imagine how your investments would perform in different scenarios, and remember that risk and return evolve over time. As you invest for longer, your upside odds improve.

One of the easiest and most efficient ways to reduce portfolio risk is to diversify – but it’s not just about holding different stocks. True diversification means holding assets that thrive in different market conditions (a core principle of our General Investing portfolios). Think bonds for recessions, commodities for inflation, gold for currency protection, and stocks for growth.

In a diversified portfolio, when one asset struggles another might be doing well. This keeps your returns closer to their average, and makes you less dependent on trying to predict the future. While you may see less exciting gains than an investor who made a concentrated bet and got it right, you're avoiding potentially devastating losses when market conditions shift.

What’s the takeaway here?

The goal isn't to eliminate risk entirely – taking on risk is necessary to generate returns. Instead, it’s about managing it to a level that aligns with your financial objectives. Consider how your portfolio might perform in different conditions, diversify – then let time work in your favour.

📰 In Other News: The US added far more jobs than expected

Bank of America predicted stocks would rally if data showed the US added anywhere from 125,000 to 175,000 jobs. Friday’s numbers, then, were firmly in “blowout” territory. There were 254,000 jobs added in September in the US, compared to economists’ predictions of 150,000 – and August’s numbers were revised upwards.

This suggests the US economy’s faring far better than expected. The unemployment rate dropped to 4.1%, beating forecasts of 4.2%, and workers were getting paid 4% more on average than at the same time last year. More wages means more shopping – so consumers will likely continue to splash their cash for a while yet.

These figures point to an economic soft landing (where interest rates fall without the economy tipping into recession) and should encourage investors to take on more risk – even if it also means smaller rate cuts next month.

🎓 Simply Finance: Risk

Risk is the potential for losing some or all of your money when investing. Think of it as the financial equivalent of weather forecasting: you hope for sunny returns, but there's always a chance of stormy losses. Every investment carries some level of risk – even keeping cash under your mattress means inflation could erode its value over time.

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* The projected rate is not guaranteed and is as of 31 July 2024. It is based on the Gross Yield provided by the fund manager.

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