How Do You Balance Risk When Saving And Investing?

Making money through investment follows a simple rule: the bigger the potential risk, the greater the potential reward. How do you strike a balance between growing your long-term savings quickly and not losing everything?

Pretty much anyone who works in Australia is forced into one form of long-term investment strategy: putting money into superannuation. If you're working full-time, your employer must pay 9% of your salary into a nominated super fund. You can top up this amount, but can't access those funds until you retire, save in some tightly-defined extreme circumstances. Superannuation is highly regulated, so while it's not guaranteed to rise all the time, over a long period it should provide you with a solid asset base for retirement.

Many Australians also make a long-term investment in purchasing their own home. According to the ABS, 70% of the population own (or are paying off) their own property, a figure that's been stable for several decades. The family home is often not counted as an asset when assessing eligibility for benefits, and negative gearing rules also mean that buying a second home as an investment is a popular option (though there's a balancing act there; if everyone wants to buy, rental demand will reduce). That's not necessarily the approach everywhere else; in many US and European cities, renting throughout your life is not unusual. Provided you can insure your property, it still seems to be a relatively low-risk tactic.

Beyond that, the range of options grows significantly. Investing in the share market become a more common activity in Australia across the 1990s and 2000s, in part because of the privatisation of many government bodies. As Telstra shareholders can tell you, there's no performance guarantees associated with share ownership though. If you look at more complex investment options such as CFDs, the risks grow even more dramatically. But then, as the global financial crisis demonstrated, even simply leaving money in the bank isn't an entirely risk-free activity, though bank collapses weren't a notable feature in the Australian market.

I imagine there's a wide range of savings options used by Lifehacker readers, and I'm curious to know what strategies you adopt; apart from anything else, it's useful information when planning topics for future Loaded columns. So let's hit the polls:

What investment and savings strategies do you use?online surveys

As ever, we'd welcome hearing your best strategies for long-term saving and investment in the comments.

Lifehacker's weekly Loaded column looks at better ways to manage (and stop worrying about) your money.


Comments

    I have an investment fund through my finacial planner in addition to my super which is also organised through my FP.

    A lot of people commented when I started up my fund that I must be making dentist money, but I'm not funds can be set up for modest amounts (mine was with a grand) and I make a monthly deposit into it. The key here is your ROI which needs to be 7 years+ otherwise you are better off leaving it in a high yield account.

    In regards to risk both my funds are high risk since I do not intend on withdrawing them any time soon. As I get closer to wanting my cash they will be shifted to more stable accounts.

    The myth these days is that individual investors can adequately understand the risk embodied in any of the "modern" investments.
    CDO's, MBS', CFD's, Unlisted assets, Listed Funds, Exchange Traded Funds, it's all smoke and mirrors , and almost nobody truly understands the risk, so the instruments are invariably mispriced. cf. Global Financial Crisis, where the agencies, who were charged with assessing the risk of complex instruments created solely to disguise the "pile of crap" that underwrote those instruments, couldn't make heads or tails of them, but went to some very nice dinners and played golf with the guys who were flogging them, so they must be ok, yeah?
    One AAA rated bond, coming right up sir.

    Seriously, if you're talking about anything other than the most straightforward purchase (of bonds, or shares, or cash in the bank), you're kidding yourself if you think you, your local accountant or the two-bit financial planner are genuinely able to assess the risk.
    Mattresses are the best bet for 95% of the population. The other 5% can swim with the sharks if they want to, but they've got no right to complain if they end up as lunch.

      Comparing a collateralised debt obligation to an exchange traded fund is ridiculous.
      CDO's are a mechanism for financial institutions to sell their obligations to bad loans to unsuspecting buyers. ETF's represent one the cheapest and risk-free ways to invest your money by tying it to the performance of a diversified index.

      Just because you don't understand how something works, doesn't mean it's dangerous.

    Step 1. Mechanical futures trading
    Step 2. ?
    Step 3. PROFIT!!!

    Meme jokes aside, I do some mechanical futures trading (with risk capital).

    Trading is the only way I'm going to escape this sh1thole of a job in a reasonable timeframe ;)

    I've done LOTS of research and practice so I am well aware of the risks.

    The main thing to understand is that RISK DOES NOT EQUAL REWARD.

    You can find 3 speculative investments all with the same reward but with 3 different risk profiles.

    e.g.,
    100% per annum @ 80% max drawdown on account
    100% per annum @ 50% max drawdown on account
    100% per annum @ 25% max drawdown on account

    So, taking extra risk does not always guarantee extra reward.

    So your search should be for low risk, high reward opportunities. They are out there.

    I call what I do speculation rather than investment. I call uneducated people who do what I do gamblers rather than speculators. In casino lingo I am card counting.

    There are a lot of cliches in investing circles that are completely untrue.

    CFDs you have be careful, all brokers are not created equal and this can have significant impact on your account. You have to take into account things like long/short interest rates, market access type, spreads, so on... very complicated for new people.

    I have a small portfolio of blue chip (i.e. 'safe') shares. I've selected shares known for generous dividends, which are always reinvested, and my portfolio is (very modestly) leveraged to magnify my returns.

    Debt is a dirty word following the GFC and I've been told off by many friends and associates I've mentioned my strategy to. Nevertheless, I think if you're sensible, conservative and above all not greedy it's a fairly safe strategy, certainly safer than investing in high-risk stocks, and so far has provided me with favourable returns pretty reliably.

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