How do I understand risk?

When investing, you are technically managing the ‘risk’ of your investment to ensure a return. For example, while some products such as money market accounts offer next to no risk with a market-related return, other more speculative investments might offer a significantly higher return – though you may run the risk of the investment failing, and your capital being depleted as a result.

To effectively manage risk, you’ll need to balance your needs against the investment opportunity and identify what level of risk you are prepared to take on to meet your goal.

What are long-term investments useful for?

Long-term investments are generally less risky, and are designed to accumulate and build capital over a longer period of time as their name might suggest.

Long-term investments can be used to accumulate funds over a period of years or decades – most commonly, an investor might use a long-term investment to one day afford a car, property, or their retirement.

What good are short-term investments?

Short-term investments, instead, can generally be more speculative and may offer larger returns based on a smaller opening investments. Short-term investments can be used to grow capital incrementally (that is, piece by piece) and are designed, in essence, for short-term gain.

As an example, an investor may use a speculative short-term investment to build their wealth to afford an immediate goal – such as an asset.

Managing short and long term investments with varying risks is a classic method through which many investors ‘hedge their bets’, and manage their wealth over time.