Chapter 2 – Risks and its Implications

To earn a better rate of return than you would expect from a savings account, you need to accept more risk. That means getting comfortable with the fact that your investments will/can go down in value some of the time. The long-term direction of the stock market is up, but it doesn’t rise in a straight line. Other investment markets might display different market behaviour and volatility rules, but the rule of thumb is that the more risk you take, the greater the potential return – but also the greater the potential loss.

As an investor, you have to decide whether you are happy to accept the risks of volatile markets for a period of time, or will you lose sleep if the markets fall? Investments can be a roller coaster ride, which is fine unless the ups and downs come are unexpected/prepared for. Ideally you should decide what you can afford to lose. Before making an investment, consider how you would react if your investments fell by 15%, 30%, 60% or even 75%. This is a really healthy exercise and can help you can set a risk limit for yourself.