Understanding Investment Risk
Risk is the possibility of losing money on an investment.
Indeed, many of us try to avoid risk where possible but risk in the context of investing, is not necessarily something to be avoided.
What is investment risk?
In investing, risk refers to the possibility of an investment falling in value.
As a rule, investments that have a higher level of risk usually have the potential to deliver a higher rate of return. There will probably be a bumpy ride along the way, riding the ups and downs of the market to get a higher return and there are no guarantees.
Depending on individual circumstances, an investor might be prepared to put up with a few bumps or decide take a less volatile approach with a lower, but steadier, return. For more risk adverse investors, an investment with a lower level of risk might be more suitable.
The decision to be a risk taker or play it safe, is a very personal decision – and could change over time depending on circumstances.
Whatever approach you choose, even investing in lower risk deposits, there will always be an element of risk. Investing by its very nature is risky, as investments can be affected by events in the financial markets or shocks to the financial system, such as the financial crisis of 2008, or the recent global pandemic. The value of investments can always go down as well as up, meaning that investors could get back less that you put in.
Managing investment risk
Whenever you invest, there’s a risk the value of investments may fall. But there are steps to take, and these are as follows:
Take time and focus on the longer term
The longer time you invest, the more chance investments ride the volatility of the market — and provides an opportunity of making a return on the investment. Investing for the longer term (usually, at least five years) is usually a good tactic.
Ensure investments are made and diversified, including equities, property, art, and governments bonds, for example. Diversification is the technical term. With diversification, if some of your investments are doing badly, potential losses may be balanced out by other assets performing well.
Spread investments over time
Investing capital on a regular basis, rather than a lump sum up front, could help to spread your risk of market volatility.
THE VALUE OF INVESTMENTS AND INCOME MAY DECLINE. YOU MAY NOT GET BACK THE INITIAL AMOUNT THAT YOU INVESTED.
Last revised May 2022