It is only when we are faced with loss, that we start to understand what level of risk we are really prepared to take.
There have been many opportunities in the market over the last 100 years to find out exactly what level of risk you are prepared to take. The most recent, the Global Financial Crisis, has once again highlighted the definition of risk.
Money is made in direct proportion to the level of risk you can handle.
Money is lost when you do not invest at your risk level.
Let me explain, in good times when people are making lots of money from investments, greed takes over, it’s not that you want more, it’s more that you feel you are being left behind. Most investors are more concerned about missing out than they are about the risks they are taking.
The effects of this sort of activity is felt when the market turns down. Now large losses are occurring. When you look at how much you have lost you have the falling feeling in the pit of your stomach. This is your body’s way of telling you that you have invested outside of your comfort zone or risk level.
Compounding your losses is the next stage of investing outside of your risk zone. Now that the walls are closing in, failure is in the air, all you want is for the losses to stop. Once again you act outside your risk level and move your investments to cash. You have now effectively destroyed any chance of making back the money you have lost.
Strangely, this decision to move to cash is made at the bottom of the market.
The repeat offender, the investments will then remain in cash until almost at the top of the next cycle when once again the investor is concerned that they are missing out.
To avoid the above mistakes it is important that you understand your risk profile, take the time and effort to do this and you will 100% of the time grow your wealth at the perfect rate for you.
You will at times make less then others, but you will resist the urge to change your investment style.
Other times you will make more, but once again you will resist locking in your gain and moving to cash. Staying the course will produce the results you are looking for.
Investing is not a group sport, it is not a race, it is a journey to the destination of your choice.
PS Before you invest find out your level of risk. Give us a call (07) 4771 4577.