Worried You’re Taking Too Much Risk?

The first thing you should think is not how much risk, but why? I see so many people in high risk individual company shares, or buying a share that has been heavily sold thinking it’s a bargain; but how many ask themselves why?

Let’s make an assumption that you’re over 40 with perhaps 20 years of work left before you retire. You manage your own investments and you read Money Mail and the like for tips on fund picks and diversification. Let’s first of all ignore the fact that you’re as well served talking to your mates down the pub as you are reading the press for financial advice, there really is very little difference between a journalist and your mate who also invests; apart from the fact he will be doing it with his own money and so will be sharing a risk.

You’re looking for big double digit returns, otherwise why are you taking such risk? But hold on before you go out and buy shares in Gold or BP or any other asset or share, how much do you need as a return in the first place? Why have you just bet your shirt and a big chunk of your retirement fund in an investment that you could lose everything on? (Northern Rock, Bradford & Bingley just to remind you safe investments don’t exist). Your first thought should have been how much do I need?

Let’s remember that you’re over 40 and the clock is ticking for your retirement, you might be worried you’ve left it too late and that’s why your throwing caution to the wind and taking all that risk, because your concerned what you have so far and the state pension will not be enough for a couple of nice holidays a year.

Why don’t you just work out what you will be spending in retirement in the first place? That’s a great starting point, how much income will you need to cover your expenditure in retirement? What’s your number? It might be you’re not too far away, or that you have a long way to go. If you aim for high growth through high risk then you might put yourself in a worse position than doing nothing.

If all you needed was 5% a year compound growth but you’re aiming for 20% with little or no real understanding of what you’re investing in beyond what you’ve read, you might find your income damaged in retirement and your holiday plans more Withernsea than Florida!

Before you decide to invest ask yourself why? How much do I need at the end? How much am I prepared to lose rather than gain? If you lose 10% you will need a return of 11% to get back to the beginning again. If you lose 50% then you need a return of 100% to get back to your starting point. How many times have you thought about that fact? I will wager not much. Anyone can invest with ease due to the internet, but most don’t really know why they are doing it other than to get a high return; but how high is enough? And is it necessary in the first place?

What’s your number? Start here first.

I am not advising you to use any products mentioned here, nor am I making a specific recommendation. The value of pensions and investments can fall as well as rise. You may get back less than you invested.

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