Every investment involves risk. If you put your money into individual securities, your risk lies solely with that company and how they perform in the market. When you purchase an ETF or mutual fund, your money is spread across a number of individual securities and the performance will be the result of the whole. To give you an idea how to gauge any investment’s risk level before you add it to your portfolio, follow these rules.
Check The Beta
Many investors use Beta to determine how volatile a particular security or portfolio is in comparison to the entire market. Any beta number greater than 1 will indicate a greater level of risk. For instance, a beta of 1.5 means that an investment return will be 1.5 times as volatile as that of the market. Vice versa, if the beta dips below 1 it implies that the investment will be less volatile than the market and pose less risk.
Look At The Company History
It’s easy to get caught up in the idea of investing in a start-up that could be the next Amazon or Facebook, but the odds of that happening are not in your favour. Instead of throwing money into unknown start-ups and crowdfunding campaigns, pick companies that have well known histories of success and trends of making money. You can reduce your risk by putting your money into businesses that have spent decades navigating through the competitive marketplace and generating solid returns to their investors.
Research The Owners
Before you put your money into a security, you should know who you are investing with. Do the owners have a track record of success? Can they easily raise capital if needed? Can the team execute their vision? It doesn’t matter how great the idea is if they don’t have the right management team. And if you can’t get a clear view of where the company is headed and whether they are positioned to weather through the market storms, then it’s best to avoid the risk.
Know What Risk Profile They Fall Under
It’s also important to understand which investments are considered high risk and which ones are deemed safe. Options, Futures, and Collectibles are considered high-risk because they can provide large returns as well as big losses. Mid-risk investments like equity mutual funds, large and small cap stocks, high income bonds, and real estate are still risky but they are relatively safe and usually provide stable returns. And the safest investments
you can purchase are government bonds, money market funds, and treasury bills. You won’t get the biggest returns but the likelihood of a return is very high.
Check If They Are Diversified
When investing in funds, you should only put your money in something that is diversified across a number of asset classes. Without asset allocation, you’re susceptible to risk during market swings. When you have a portfolio that is properly diversified, your investments will continue to grow no matter what the market condition.
Predicting the markets is challenging, especially if you don’t have a background in finance. So when you’re trying to gauge any investment’s risk level and you’re not confident with your decision, call someone who is. At The Beacon Group of Assante Financial Management Ltd., we’ll help you manage your risk and create a balanced portfolio that will take advantage of the markets up and downs while maximizing your growth tax efficiently. Contact us to find out more.