What is risk?

Risk in stock investing is not that you will lose everything, although that is often thought. Risk is the chance of fluctuations.

The pitfall of too low a risk appetite: saving is also risk

Investing involves risk, this is a well-known truth. The fear of losing therefore keeps many from investing. But what is often overlooked is that too low an appetite for risk can also be a risk. In this article, we discuss the pitfall of too low an appetite for risk and highlight the advantages of a diversified investment portfolio for long-term returns.

Risks of investing: more than just price loss

Most people associate investing with the chance of price loss. And yes, that chance is real. Stock prices can fluctuate, and in extreme cases even drop to zero. However, there is more to risk than just price loss.

  • Inflation: The purchasing power of your money gradually decreases due to inflation. Suppose you save €10,000 in a savings account with an interest rate of 0.1%. After ten years you have €1,000 more, but your purchasing power has decreased by say 20%. In fact, you have lost money.
  • Missed opportunities: By choosing a savings account with a low return, you miss the opportunity to take advantage of potential growth in the economy. Historically, stocks have earned higher returns than savings accounts over the long term.
  • Long-term goals: For many people, investing is a way to achieve their long-term goals, such as retirement or college for the children. With too low a risk appetite, chances are you will not achieve these goals.

The benefits of spreading

A diversified investment portfolio is a powerful tool for reducing risk. By investing in different asset classes, such as stocks, bonds and real estate, you reduce the chances of losing everything if one asset class declines in value.

  • Diversification: By diversifying across different sectors, regions and asset classes, you reduce the impact of negative developments in one specific segment.
  • Stability: A diversified portfolio provides more stability in your returns. The peaks and valleys are capped, resulting in more gradual growth.
  • Risk management: Diversification allows you to match your risk profile to your personal goals and risk appetite.

Finding the right balance

The key to successful investing is finding the right balance between risk and return. Too low a risk appetite can jeopardize your goals, while too high a risk can disrupt your night's rest.

  • Determine your risk profile: How much risk are you willing to take? This depends on your age, financial situation, investment goals and horizon.
  • Create an investment plan: Prepare a plan with your investment goals, risk profile and the asset classes to be used.
  • Reassess periodically: Your risk profile may change over time. Evaluate your investment portfolio periodically and make adjustments as needed.

Thus, too low an appetite for risk can jeopardize your long-term goals. By choosing a diversified investment portfolio with an eye on long-term returns, you can reduce your risks and increase your chances of success. Remember: return is also risk.

save

The saver is someone who chooses security over returns. Low risk resulting in very low returns. The main goal is capital preservation and having money readily available for unforeseen expenses.

defensive

Defensive investors are cautious and want to minimize risk. They invest mainly in bonds and safe mutual funds. Returns are moderate, but preserving capital is the top priority.

moderately defensive

These investors seek a balance between return and risk. They invest in a mix of bonds, stocks and real estate. Although there may be some volatility, they aim for stable long-term growth.

moderate offensive

Moderately offensive investors accept some risk for potentially higher returns. They invest primarily in stocks and diversify their portfolio to spread risk.

offensive

Offensive investors have a higher risk tolerance level and invest primarily in stocks. They seek significant long-term growth and accept temporary market volatility.

highly offensive

Willing to accept significant fluctuations. They invest in stocks, often with a specific focus, derivatives and volatile sectors for maximum growth, with significant short-term fluctuations.

Wondering what we can do for you?

With about sixty colleagues in two locations, we are never far away. All advisors are trained as financial planners and understand better than anyone how important it is to see assets in the bigger picture.

class="lazyload