Taking a Calculated Risk On Investments

Looking back, I can think about how my friends and family thought I was mad. Leaving a well-paying, secure job, and moving halfway across the world to be a freelance writer? Surely I’d be back within the year, broke and trying to find a new job again in Auckland.

My goal was to be able to support myself and save, all whilst living a carefree life abroad. And while everyone else thought it highly risky, I’d already calculated the risk involved. This is the same as investment risk: the chances of reaching our goal – in the case of investment, though, financial.

Figuring out how much risk is involved

I knew to achieve my goal, I’d have to minimise the chances of failure. This is what you want to do in any investment scenario also.

I’d worked out I was likely going to be successful in my endeavour if I did the following:

• Start writing on the side while at my old job to ensure enough work was available
• Pay off all debts
• Accumulate savings to live off should I not make as much as expected for some time
• Pick a low-cost destination to start off in

So, I minimised the risks, and 3 years later… I’m happy to say it paid off.

Of course, there were ups and downs – times when I questioned my choices and worried whether work would keep coming in, but I’d prepared for this. I had backup plans, and most importantly, I understood taking calculated risks was part of the process. Without risk, there’s often no meaningful reward.

I also learned risk tolerance changes with time. In my twenties, I was willing to take a bold leap, because I felt I had time to recover if it didn’t work out. Likewise, your tolerance for investment risk may shift depending on your age, income, and personal circumstances. Being honest about this is important when choosing how and where to invest.

Investing works the same way

Thinking about goals and minimising risk as we do in our real lives is the best way to look at approaching investing our finances, too. Set a financial goal, see what you can do to minimise the risks, and then take a (calculated!) leap of faith.

Volatility vs risk

When we talk about investments, we talk a lot about volatility. This is the fluctuation in returns expected on investment. So, for instance, when we set a returns goal of 3%, and our desired shares have fluctuated between 5% and 12% for years, we don’t have a big risk in terms of volatility.

However, there are other risks in investing in the stock exchange. The Financial Markets Authority has a list of 7 risks for investing:

• Interest rate risk
  If interest rates rise, you won’t earn as much back as you would have otherwise
• Inflation risk
  The risk inflation will be higher than your investment returns
• Industry risk
  If the industry you’ve invested in has a downturn
• Liquidity risk
  Buyers may be hard to come by when you want to sell up
• Currency risk
  The value of the NZ dollar will fall
• Economic risk
  If a global recession comes about
• Credit risk
  If the company you’re invested into can’t repay their debts

Some of these risks may be able to be predicted, and some may not.

That’s why diversification matters. Just as I didn’t throw all my eggs into one basket when moving overseas, investors shouldn’t concentrate all their money in a single place. Spreading your investments can help reduce exposure to any one risk – and ultimately improve your chances of long-term success.

Risk isn’t the enemy

When investing, take a careful analysis of the risks before diving in. Risk is not inherently bad – it’s necessary for a successful life. With the right investments and level of risk, you can find good returns on your dollar.

If I hadn’t taken a chance on myself, I’d still be wondering what could have been. Investing is much the same – it’s about knowing yourself, doing the groundwork, and giving your goals the chance to come true.