Let’s be clear, that in the context of investment vernacular, risk is often confused with the word ‘volatility’. Risk implies the probability of complete loss, whereas volatility refers to the fact your investment can fluctuate in value in the short term. Gambling lends itself to the word ‘risk’, which some types of investments are, yet ‘volatility’ is what most of our investments do during the period of time we invest. In this article both terms used refer to volatility.
You’ve probably heard it a thousand times: Diversify your portfolio, stick to your guns, and invest for the long-term. But in a world that’s changing by the minute, should we only stick to what we know, or should we dare to venture into the unknown? If you’re keen for the adventurous path, you’re determined to get more, from less, but you will be taking some risk in the process.
This article covers 3 mindsets you can adopt to ensure you’re not taking risk for thrills, but rather you’re doing it to enhance returns over time. I caught up recently with Frances Cook to discuss this topic in far more detail – check out the conversation here.
Focus on What You’re Building, Not Just the Tools
Let’s face it, many investors get hung up on the tools of the trade: ETFs, shares, bonds, and investment properties—the mainstream stuff. These tools aren’t bad, but they’re just that—tools. Imagine trying to build a house solely with a hammer and nails; you’re going to need more than that. Take margin lending, for example. Most people hear “margin” and freak out, thinking about horror stories of wiped-out accounts. But what is it, really? It’s a tool that lets you borrow against your current assets to buy more of an investment (kind of like what happens when you buy an investment property, but with shares instead). Used smartly, it can amplify your gains because you’re using leverage (when the sum of your inputs, are less than the sum of the potential outputs). But yes, if you’re reckless, you can lose more than you invested. The point isn’t to shun margin lending; it’s to understand it, weigh the pros and cons, and decide if it fits into what you’re trying to build.
Banks, investment managers, and even online apps can provide you access with margin lending facilities.
Bring All of Your Mind to All of Your Portfolio
Don’t just throw some cash into an index fund and call it a day. We’re talking about your future, and last I checked, you wouldn’t half-ass your own life, so why would you do it to your investments? If 80% of the time you find yourself believing what the average person believes, then invest like the average person with 80% of your portfolio (or collection of investments). Are you a bit special though – a bit quirky? Well perhaps for the rest, you invest accordingly. This could be split 80/20 between conservative and mainstream: riskier and alternative, or 80% passive with 20% active, or 80% believing the past will persist into the future, with 20% positioned according the world never being the same again.
This is where CFDs can come in handy. These are Contracts for Difference, essentially agreements to exchange the difference in the value of an asset from when the contract is opened to when it’s closed. Sound complex? Maybe. Risky? Certainly, and in the truest sense of the word too. But, if you’re a risk taker, and you hold alternative views, why wouldn’t you invest accordingly? Just like with your job, with your friendships and even family, surely you’d prefer to be ‘all in’ right? Put another way, if you have an itched not getting scratched, it’s likely going to crop up somewhere unpleasant. Bring all of yourself, to all of your portfolio, but do it with intention and design to manage the risks.
Consider the Macro, Not Just the Micro
You’re not living in a bubble, and neither should your investments. We all like to focus on our own backyards, our jobs, our homes, our immediate lives. But the world out there has its ways of affecting your local piece of paradise. Let’s talk crypto. We’ve all heard of Bitcoin, the granddaddy OG of them all. And while it’s the poster child of the crypto movement, it’s shown us while it’s off crypto, it’s not like all the other. For the first time we have digital scarcity we can own, outside of banking rules and government decrees – if you live in comfort and don’t believe what you see in Argentina could ever occur here, well, I hope you’re right. Bitcoin can be used as a hedge to offset worrying worldwide trends (hyper-inflation, geo-political instability, banking instability etc), or it can be an investable asset class. Yes, there’s risk, but it’s usually risk that comes from the hands that try to get hold of it, not the asset itself. It’s an investment you can hold that helps you hold your own in the macroeconomic stage – ignore it at great expense but get advice before taking action (we can help with this). Should you put all your eggs in the crypto basket? Hell no. But it warrants a place in the dialogue of your investment strategy, especially when we’re talking about the future.
Wrapping it up
Investing is not a one-size-fits-all game. Don’t just focus on the tools; focus on what you’re building. Give your investments the attention they deserve; they’re as much a part of your life as anything else. And finally, remember the world is bigger than your backyard; don’t ignore the changing tides. We’re in a world that rewards the well-rounded, the thoughtful, and those who dare to think a little outside the box. So go ahead, take a calculated risk; you might just find it pays off.
If you want to learn more, check out New Wealth Foundations, where we cover mainstream and alternative investments.