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When you invest, how much risk is enough?

by , 21 May 2014

Investing is all about taking on certain levels of risk in the hope of reward. With investing, risk all comes down to the volatility experienced in the assets you put money into, for example, a share. The big question when it comes down to your portfolio is how much risk should you take on? Let's take a closer look at how to answer this…

How much risk is right for you?

The amount of risk you’re willing to take on comes down to the trade-off between returns and volatility.

For example, if you can handle your portfolio experiencing big swings and the potential losses that go with that, then risky assets are for you.

Risky assets include trading instruments such as single stock futures and contracts for difference (CFDs).

What about investing in penny shares?

Investing in penny shares is another asset that comes with added risks due to their high level of volatility. Investing in penny shares is more risky than investing in one of the top 40 companies on the Johannesburg Stock Exchange.

When you invest in penny shares, there’s the potential for a big win. But there’s also the potential for a big loss, David Thornton in Penny Sleuth explains.

Trading geared instruments and investing in penny shares highlights the need for using strict risk management techniques, such as stop losses. This can help to reduce your losses and therefore your risk.

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Investing is all about managing your risk

When you invest, your strategy should be so that you can build your wealth over a number of years. And spread your risk in such a way than one bad performance isn’t going to drag the rest of your portfolio with it.

Of course investment risk is something you need to deal with and learn to live with. But you need to choose how much risk you’re comfortable with based on how much you can afford to lose.

And don’t forget that over the long-term, shares have shown to appreciate in value.

So there you have it, how much risk is enough when you invest.

When you invest, how much risk is enough?
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