What are the risks of investing in shares?

Buying shares comes with a number of risks and it’s important to understand and be comfortable with them before investing.

The biggest risk of investing in shares is that you could lose some or all of your money. It’s important not to trick yourself into thinking that this couldn’t happen to you.

There is the risk that an individual company or broader market, like the Australian share market, doesn’t perform as well as you expected it to, causing your shares to fall in value.

Worse still, a company could go out of business and you could lose everything that you invested in it.

When you make investments, you should have realistic expectations about how they might grow and what you might achieve as a result. Set the bar unrealistically high and you’ll need to take on more risk and open yourself up to higher potential losses.

Questions to ask yourself

How much can you afford to lose?

The price of shares will go up and down so think seriously about how much money you could tolerate losing without it impacting your lifestyle.

Will investing keep you up at night?

Think about how you would feel if the value of your share portfolio fell by 10%, 20%, 30% or 50%. You should set this range for yourself and find the right balance of investments to match your capacity for losses.

How long do you have to invest?

Your tolerance for risk is always linked to the length of time you have to invest. The longer you have to invest, you more able you will be to withstand the ups and downs of share markets. If you are trying to make short term gains, you will be more vulnerable to short term losses.

Can you afford to not have access to your money?

If there’s a chance that you’re going to need to access your money in the next year or two, shares are probably not for you. If the share market unexpectedly goes down in that time, will you be able to wait for a recovery?

How can you reduce risk?

Diversification is a crucial part of any investment portfolio. Investing in a range of assets that are exposed to different types of risks and whose performance is not strongly correlated can help you reduce the risk of losses.

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