Decide how much you can risk on volatile assets

In general terms, the more important it is for an investor to generate a fixed income from their portfolio, the lower the percentage that should be invested in volatile assets. Hand in hand with this approach, however, is the fact that the safer the asset, the lower its return.

The table shows three types of portfolios, ranging from moderately conservative to one that has a higher risk/return make-up. These are not recommended portfolio weightings but are designed to explain the weighting strategy.

A completely conservative portfolio consists of nothing but Government stock and cash, which is one way of protecting capital but gives away a lot of potential income. A highly aggressive portfolio would have virtually nothing but shares.

Notice that as a portfolio becomes less conservative, the percentages in assets with little volatility - such as Government stock - diminish, while those in more volatile assets - such as shares - go up.

A portfolio with more volatile assets in it is likely to deliver a negative return more often. On the other hand, this is more than compensated for by typically higher returns during the good years.

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