Generally speaking, the ‘risk’ someone is willing to take compensates them for the possible ‘return’ they may receive. Of course, ‘risk’ goes both ways. Added risk increases the chances of higher growth, conversely, it also increases the chances of greater decline.

When considering what ‘risk’ you want to take to increase your asset value, ask yourself this question. If the asset I invest declines by 50%, how much does it have to then recover so that I may break even again? 50%? Incorrect…

After suffering a 50% decline in value, your asset must then appreciate by 100% (or double in value). That’s right! It must work twice as hard just to break even!

Studies have shown that the emotional satisfaction of winning $100 is nowhere near the dissatisfaction of losing $100. Most investors who invested through the GFC would attest to this comparison.

Diversification should come into this equation also. Even quality assets will suffer declines from time to time but it’s when all your eggs are invested in one basket that you really feel the impact. Aside from reducing the volatility caused by such declines, conversely, other asset classes in your portfolio may have risen over the same period. This has two benefits:

1. It smooths your returns, and;
2. It allows you to take profits from that outperforming asset class to re-invest into the underperformer, if there is a case to do so.

Diversification and risk management are key to investment success. If you’re interested in speaking to one of our advisers please contact us on 03 8548 4800, email [email protected] or visit www.hewison.com.au