You should always bear in mind, 'high risk = high return'. But, what is risk? The Oxford Desk Dictionary defines risk as 'chance or possibility of danger, loss, injury, etc.' Before taking part in investment activities, you have to realise your level of risk tolerance. This is when you feel comfortable with the level of risk in your investment. In general, there are three distinct levels of investment risk. Aggressive / Speculative Approach: Those are the riskiest investments in the portfolio, such as options, single industry or sector funds, single country equity funds, high-yield corporate bonds, small companies with potential rapid growth, etc. Growth and Balanced / Investor Approach: Those investments carry less risk, and are less volatile in their price fluctuation, such as blue chip companies, long-term corporate bonds, and global equity funds. Capital Preservation / Saver Approach: Those investments carry little or no risk, such as fixed deposits, money market funds, guaranteed funds, and US Treasury Bonds. When you are young and more than 20 years away from retirement, you may tend to be a speculator. The growth and balanced section should be the core of your portfolio. You can use the subtraction method to calculate the percentage of the equity investment within your portfolio. Subtract your age from 100 to compute the percentage of the growth-oriented investments. If you are 20 years old, the percentage of the equity should be 80. Moreover, do not ignore the compound effect of the re-investing dividend in order to maximise the growth over time. When you are middle aged and understand the risk but cannot feel comfortable with the risk as the speculator, you may tend be an investor. You may adjust your portion from aggressive to the capital preservation section in order to reduce risk. And, when you are a retiree and understand the risk but want to avoid it, you want to remain as a conservative saver. Since you may start to tap for income, capital preservation will form the core of your portfolio. The suggestion here is just a rule of thumb for general use. You should make a unique and personal portfolio for yourself that matches what you desire to achieve. Dr Sze is the president of the Society of Registered Financial Planners If you have a money-related question, send it to yp@scmp.com with Money Matters as the subject
