Risk vs Returns – How to estimate the perfect balance?
Risk versus returns, how to balance these while investing is the age-old question that bothers almost every investor. It is a given fact that the higher the risk the better the returns and lower the risk more modest the returns. We know that no investment, no matter how safe, is free from risk. Even if you only hold cash or bonds, you are exposed to the risk of inflation and the fluctuation in interest rates. Whatever you do with your money, there will always be some risk involved. But there are few strategies that you can adopt to minimize the risks and maximize the returns on your investment. One way to protect yourself against some risks is to take additional calculated risk like by investing in the stock market. Even if they represent a higher-risk investment, sometimes only stocks have the growth potential you need to counter the effects of say inflation and more and ensure your future financial security.
Managing risks and maximizing returns
Another obvious strategy to reduce risks involved in financial investing is diversification. In the financial market it is never advisable to place all your eggs in one basket. Diversification increases returns and reduces risk by combining high equity returns with a solid base of cash and fixed income investments. Analysts have discovered that by combining two or more investments with different returns to the same event, it is possible to reduce risk and increase returns at the same time. Different sectors of the economy and different investment instrument may react differently to the same events. For example, a bullish stock market will increase your returns from the stock market but will have an adverse effect on returns from gold bonds and vice versa. By holding cash, bonds and stocks in your portfolio, you use a so-called ‘diversification’ strategy, probably the most important and effective investment strategy you can use. It also helps achieve two other irreconcilable goals of investment which are reducing risk and increasing returns.
Financial Strategy and risk management
Return on investment is highly dependent of assets allocation. Asset allocation will depend upon your financial goals, appetite for risk, time period one wants to stay invested and more. You will need some cash to enjoy some security and liquidity that will also allow you to take advantage of opportunities when they arise. Ideally asset allocation should be done such that it contain a healthy mix of various financial instruments such as cash, stock, bonds, funds and much more. Studies show that over 80% of long-term portfolio returns depend on the composition of the assets or allocation of assets. Thus an investor should first ask himself what his assets should be, how the capital should be divided between the categories and what percentages should one invest in various assets. Asset allocation means answering all of these questions. Incredible as it may seem, it’s not so much the shares or mutual funds you’ve chosen that matter as the asset mix that you will choose. So take the time to determine the right combination of assets before you start choosing the stocks or mutual funds you will invest in; it’s worth it.
Selection and management of funds is bit a difficult task, as it involves a lot of understanding like financial goals, risk appetite and the time one wants to invest. Upwardly simplifies your investment with portfolio strategy which is specially tailored for the Indian market, you can visit their website on https://www.upwardly.in/ and read more about their services.
Maximizing returns through financial planning
Balancing risk and returns is a major part of any financial strategy or investment. The balancing act has to done both when doing asset allocation and when doing portfolio development. To balance risk and returns the strategy that an investor will formulate should cover objectives such as growth, protection, tax benefits, peace of mind and preservation of capital. Other important questions that you need to ask yourself are what are your financial goals? What is your investment horizon? And what is your level of risk tolerance? Age is another important factor. Generally, the younger the investor is the bolder he can invest. As one grows older, one needs to be more careful because you have less time to make up for any potential loss of value in your portfolio. The time one plans to stay invested is also very important as the longer one stays invested the lesser the risk and higher the returns. It is the mantras of financial gurus that diversification along with patience is what leads to success in the financial markets.