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Managing investment risk
Investing might not be as exciting as winning the lottery (a pity!), but it shouldn’t be overly stressful either. One of the best ways to protect your growing nest egg and offset some of the risks that come with all investments is to have a risk management strategy.
To create your own, you need to:
1. Look at your budget
2. Make a list of the type of investments you’re wanting to make
3. Develop a plan to weather any uncertainties that might pop up. Questions you might ask yourself are:
- Would a downturn in your investment put your day-to-day finances or assets (like your house) at risk?
- Are you protected if you lose your job or experience total permanent disability?
- Do you have alternative sources of income?
- Are you comfortable with the level of risk you’re taking?
- Do you have a rainy day or emergency fund to support you?
4. Consider the flexibility of your investments – can you cash out or move things around quickly if you need to, or are you locked into a certain timeframe or process?
Big questions, but they’re important.
Brain hack
While general advice is to hang onto investments so that losses have time to turn into gains, sometimes you need to accept defeat and move on. We've all experienced the 'sunk cost fallacy' at some point – that psychological thing that gets us feeling that just because you’ve invested time or money in something, you’ve got to stick it out.
But while hanging onto an investment to weather a downturn could help you see bigger returns in the future, you need to be wary of sinking more money into something that isn’t going to give you returns.
1. Income protection
A savings buffer can help you with a dip in earnings, but income insurance can ensure that if you’re unable to work for a longer period of time, you’re about to cover your expenses and are not defaulting on any payments or losing your good standing with the financial world (which may affect your ability to get loans or take on debt in the future).
2. Health insurance
While policies can vary greatly, even just having hospital and ambulance cover can be a help in unexpected emergencies, and may help lower your tax bill.
3. Home insurance
From natural disasters to individual incidents, house and contents insurance can literally be the thing that keeps you safe and dry when times are tough. But many of us are under-insured. If you own your home, you'll want to make sure your asset is not only protected but that your policy reflects any additional value you’ve built into it over the years.
4. Life insurance
While we generally think of life insurance as something to support your family after you’re gone, it can also be accessed should anything serious happen to you, like injury, illness or total permanent disability. Premiums and benefits vary wildly, so make sure you shop around to find one that works for you.
Hot tip
If you have an investment property, you can take out landlord insurance which can cover the building and any contents, as well as supporting you for a range of events including tenant damage, theft or if your property is uninhabitable after a natural disaster. Coverage can also include liability insurance in the event that your tenant is injured on the property, or rent recovery assistance if you need to go to court to recover unpaid rent.
Use this simple life insurance estimator to help you estimate the amount of life cover you might need.
Note, the calculator only deals with life cover. It doesn't address other types of life insurance, like income protection, total and permanent disability (TPD) or trauma cover so it's worth speaking with an expert for advice on the right amount of cover for your unique circumstances. Find out more here about life insurance and income protection.
There’s no insurance on your investments themselves, so protecting the rest of your income and your assets is the best way to protect yourself against the ups and downs of the market.
Action
Check in with your superannuation account. Many funds will include some sort of life, injury or income protection as part of their super policies, so if you’re already paying for one set of insurance there’s no point spending big on the same thing with someone else. It is important to check it against competitors though, and weigh up the value and benefits against other options.
The information set out above is general in nature and has been prepared without taking into account your objectives, financial situation or needs. Before acting on the information, you should consider whether the information is appropriate for you having regard to your objectives, financial situation and needs. By providing this information ANZ does not intend to provide any financial advice or other advice or recommendations. You should seek independent financial, legal, tax and other relevant advice having regard to your particular circumstances.