What is investment risk?
Simply put, risk is the possibility of losing some or all of the money you have invested. The outcome of your investment is uncertain. Conversely, if an investment is safe, you are certain to get back the initial amount (the capital) that you put.
What types of asset classes are the most risky?
There are four main types of investment assets and these can be classified according to their level of risk. Moving from low risk to high risk, the types of assets are:
Cash, such as depositing your money in a bank or building society account, is generally considered the safest type of investment, and stocks and stocks are the riskiest.
Within each asset class, there are also sub-categories. Bonds, for example, are generally less risky than real estate or stocks, but the level of risk depends on the particular type of bond you invest in – for example, gilts are generally considered to be safer than bonds. ‘business.
Likewise, although stocks are the riskiest type of investment, if you choose a collective investment fund that invests in a range of stocks and is professionally managed, then your risk is less than if you are investing directly in one company.
If there is a risk, why invest?
The reason people are willing to take a risk when investing is that in general higher risk investments have a greater potential for payoff, while low risk investments tend to have lower returns. . A bond can offer a return of only a few percent and this amount is fixed over a set period of time, while an investment fund offers the possibility of earning a much higher return, depending on the performance of the stock market. .
What risk are you willing to take?
Some people are naturally more careful than others. For many people, the possibility of losing some or all of their money is simply too great a risk to take.
Consider a scenario where your stocks have just lost value by 25%. If this news makes you rush and sell them in an effort to cut your losses, then stocks are probably not the right investment for you, but if you think you would be comfortable weathering such fluctuations in the market price. market, so taking a higher risk investment is something you might want to consider.
Remember, it’s your money and you need to be comfortable with any investment decisions you make. It should also be added that our attitude to risk tends to change over time as we age or our personal circumstances change. A parent with three dependent children is likely to have a different risk profile than a single person with no dependents.
Risk and time: how long do you plan to invest?
Once you’ve determined how much risk you’re willing to take, you also need to figure out how long you’re willing to invest. Typically, high-risk investments, such as real estate, stocks, and stocks, require you to invest for the long term. Indeed, historically, stocks have appreciated in value over the long term, but their value tends to fluctuate in the short term. Investing in stocks is normally only recommended if you plan to invest for more than five years, this way you are more likely to weather fluctuations.
Is there a safe investment?
The risk of inflation is a hidden threat to any investment, and while you may be lulled into a false sense of security as your bank balance quietly accumulates interest, it is possible that in “real” terms you will lose. money. That’s because the rising cost of living means £ 100 will buy you less ten years from now than it does today. So, in order for your investments to be really safe, you need to make sure that they are earning more than the rate of inflation.
Can the investment risk be managed?
The old adage “don’t put all your eggs in one basket” applies to investments. Even though the risk cannot be eliminated, it can be managed.
You can do this by placing your money in a range of investments. So if an investment loses money, it can be offset by your other investments. Having a product portfolio, or diversifying, helps spread risk.