Business & Finance

Principles of Risk and Reward in Investment Management

Investment Management Risks and Rewards

The relationship between risk and reward is one of the most fundamental principles of investing. You take a great risk and receive a great reward. You also risk a great loss. Yet, if you avoid risk entirely, you don’t reap any reward – which does not help your portfolio grow at all. 

What most find challenging is choosing how to scale their risks and rewards. Proper investment management can guide the way. 

Understanding Investment Risk

It is important to understand risk when you are putting together an investment strategy. This means a little something different to every investor and it is something that is necessary to determine before the investments are made. 

How big of a risk are you willing to take to get a reward? 

Work with a financial consultant and draw up an Investment Policy Statement (IPS) so that your investments will always be in alignment with your goals and willingness for risk. 

Factors The Impact the Level of Investment Risk

Certain factors play a role in your level of investment risk. Some are completely outside of your reach, such as recession and inflation. However, there are other factors that you do have control over – and they impact the level of risk you are willing to take. 

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Skill and experience. If you are new to investing, you may be less inclined to take a large risk. Instead, you will want to gain some knowledge and experience about what you are doing – and get comfortable with your investments before branching out. This is often why most people seek out experienced financial consultants to handle their investment management. 

Risk tolerance. Are you interested in the thrill that risk brings? Does the idea of potentially losing in investments make you hesitant? You have to be comfortable with the risk you take. You have to know and understand that you could win – or you could lose. And you have to be okay with either one. How much risk can you tolerate? 

Risk capacity. How big is your capacity for risk? How much can you afford to lose? You never want to put all of your eggs in one basket so you will have to see what your capacity is. What would happen if you lost money? How will it impact you? These are things to consider so that you can set limits on what you are willing and not willing to do. Sometimes having investments at different risk levels can prove fruitful. 

Financial goals. Talking over your financial goals with a skilled consultant can help you see just how aggressive your investment management may need to be. Or, if you have a long time to reach them, perhaps a less risky approach can be used. 

Risk vs. Reward in Investment Management

The risks you take when investing are almost always directly related to the reward you will receive. In other words, you can take a great risk and earn a great reward. Or play it safe and earn less. Of course, investments can be tricky and can lead to unexpected results. 

Investment management plays a role when it comes to risks and rewards. 

Working with a seasoned consultant gives you access to some of the best investment options and the ability to create a plan that will help you reach your financial goals. This may mean putting together a combination of high and low-risk investments, as well as making good choices on low-risk investments that provide great returns. 

How you choose to invest all comes down to your personal understanding and feelings about risk. 

The Investment Counsel Company is ranked as one of the Top 100 Independent Financial Advisors, offering wealth management services to those with $1,000,000 or more in investable assets.