How to Balance Risk and Reward in Long-Term Investments

How to Balance Risk and Reward in Long-Term Investments

Risk is a necessary part of investing. However, investors must understand the risk they are taking. Striking the right balance is crucial to achieving financial success while avoiding pitfalls. By properly managing risk and reward, you will be on the road to growth and long-term wealth creation.

This blog aims to help you understand how to balance risk and reward in long-term investments. We have industry experts at NIWS who have brilliant minds and extensive experience in share trading, investment, and portfolio management in the stock market. Join our best stock market course in Jaipur 

What are the Risks in Long-Term Investment? 

Risk refers to the possible loss or uncertainties regarding the returns on an investment made by the investor. The expected returns can differ from the actual returns, potentially resulting in capital loss.

Types of risk:

There are multiple types of risks associated with investment. Let's get into details-

Market risk

• When a market declines, it can affect the value of the investment.
• For example - an economic recession can cause the values of all stocks to go down.

Interest rate risk

• This risk happens if the interest risks fluctuate and negatively impact the stock prices.
• For example, when interest rates rise, the value of existing bonds typically falls.

Credit risk

• Credit risk refers to the possibility of loss due to a borrower defaulting on a loan or not meeting the obligations.
• For example- if a company cannot pay stockholders or face potential bankruptcy.

Liquidity risk

• It is known as liquidity risk, when you cannot quickly sell your investments without significantly reducing the price.

Inflation risk

• This risk is associated with the danger that returns on investments may not keep pace with inflation.

What are the Rewards of Long-Term Investment?

Rewards refer to the potential benefits that investors will achieve from their investments. The rewards are completely based on the type of investment and the amount that was invested.

Types of Rewards:

Long-term investments can offer a variety of rewards. Let's look into it-

Capital gains

• When the investments are sold at a higher price than their purchasing price, it is known as a capital gain. 
• For example, investing 50,000 in TCS shares and selling them at 1,00,000 will result in 50,000 capital gains.

Dividend income

• The dividend is an income you receive if you invest in shares or mutual funds.
• For example- when a company distributes a portion of its profits to the shareholders, it is known as the dividend income.

Rental income

• This income is earned when you lease or rent out your property.
• For example, owning and renting out an apartment generates monthly rental payments.

Interest Income

• This income is usually earned from bonds or savings accounts that pay interest over time.

Strategies to Balance Risk and Reward During Long-Term Investments 

Some of the strategies that can help you balance the risk and reward include-

 Asset Allocation:

• Simply allocating your investments to different asset classes can reduce the risks.
• Investments can be spread across different sectors, industries, and geographies, which will help you minimise the risk if one sector does not perform well.
• A balanced portfolio includes a mix of bonds, shares, and real estate. All these asset classes help solidify the investor's financial position.

Investment Selection:

• You must invest in high-quality assets.
• Higher-quality assets can withstand market volatility and generate consistent returns.
• Selecting an investment can be tough, so conducting proper research and analysing their financial health is crucial, as only investments made in high-quality assets can help you gain rewards.

Risk Management Techniques:

By adapting risk management techniques, you can save yourself from the losses. Some of those techniques include-

Stop-loss orders are buy or sell orders placed by traders to limit their losses. They are usually placed when there is a concern that the prices of the shares may change against the trade.

Hedging strategies- Buying and selling an investment to reduce the risk of losing an existing position.

Dollar-cost averaging is when a fixed amount is invested regularly, regardless of the share price. It's an excellent way to develop a disciplined investing habit,

Conclusion 

Whether you're a seasoned investor or just starting your investment journey, understanding how to balance risk and reward is essential for long-term financial success. Finding the right balance between risk and reward in an investment requires significant time and effort. Strategies such as proper risk management, effective asset allocation, and selecting high-quality assets can help balance out rewards and risks. With these strategies, you can maximise your chances of achieving long-term financial success.

Connect with NIWS to gain more insights about these strategies. Our expert can guide you in your investment journey.