We know how much to invest from the previous post: Investing Fundamentals: How Much Do I Invest?
The next concept we want to think about is where we should be placing our money and this allocation will be based on the risk of the investments.
You might be familiar with the concept of risk-reward, which states that the higher the risk of a particular investment, the higher the possible return. This will help us to apply some sort of logic to our own circumstances and give some guidance around allocating our funds based on risk and return.
Each investment will have a different risk profile and some more risky than other. Example, a small exploration mining company without any certainty on finding something will have a higher risk than a large established ‘safe’ company like CBA.
From here on I’m NOT going to consider Cash sitting in the bank as an investment – that is part of your Emergency Fund established in the previous Post. Here on, investments are anything other than bank deposits.
Each person will have different risk profiles depending on their situations and life experiences. Use the Quiz below to get a feeling of your risk profile and how you can start looking at structuring your investment portfolio:
Risk Profile Quiz
Now that we have a better understanding of what OUR Risk Profile is, let’s look at what kind of assets we should start investing in based on this profile. See the next Post in the series: Investing Fundamentals: Investments Based On Risk Profile