Why not all risk is bad for your investment portfolio
Credo's Deon Gouws shares valuable pointers about risk on The Money Show.
Picture: Pexels
Investing can be a tricky business, and even more nerve-racking when markets are particularly volatile.
However, could not taking enough risk actually present a risk in itself?
The concept of risk very important when it comes to investing, particularly because it is often misunderstood says Deon Gouws, chief investment officer at global wealth management company Credo.
If you had to speak to different investors you'd get a range of definitions, but Gouws sums up the meaning of investment risk very simply.
"Risk is the potential of losing money; risk is the potential of destroying capital on a permanent basis."
Deon Gouws, Chief Investment Officer - Credo
While people often conflate the two, risk does not NOT equal volatility, Gouws says.
"The way I put it is that volatility is to choose an interesting route... but at least you're getting to the right destination, whereas risk is actually the chance of getting to the wrong one."
"The reason why a lot of people think of volatility as risk, is volatility is something that can be measured... but if you get to the other side in one piece, if you made decent money, then you've overcome the risk and you can actually ignore the volatility."
Deon Gouws, Chief Investment Officer - Credo
3 POINTERS ABOUT RISK:
1. Risk sounds like a bad thing, but risk is actually your friend if you’re an investor – if there was no risk, returns would be lower on average.
2. The ex ante relationship between risk & return is positive (the more risk you take, the bigger the potential return); but the ex post experience (actual returns) could be very different. (like betting on a single number in roulette - if you get it right, the payout is 35 to 1, but most of the time it will actually return zero)
3. Investing in the stock market is a much less risky proposition: as long as you have the stomach to stay invested during the occasional downturn. (History shows that, over periods of 10 years or more, odds are close to certain that you will make money)
Scroll up to the audio player to listen to Gouws' detailed advice