What do you know about investment risk?

Saving and investing are powerful tools for building your wealth and achieving your financial goals, but what are the risks?

Understanding the different risks that come with investing is essential.

Below, we outline everything you need to know.

What is risk?

In investment terms, ‘risk’ is the possibility of losing money. This happens when your investment falls in value. The amount of  risk you take will determine how much growth you can potentially achieve.

As a general rule, higher-risk investments can offer the potential for higher returns.  However, you’re also more likely to experience bigger rises and falls in value along the way, which can be stressful.  

If this isn’t for you, you could opt for a lower-risk investment. This may be less volatile, but your returns could be less.

Attitude towards risk

This means deciding how much risk you are willing to take. It’s a personal decision and will depend on factors such as your own circumstances, your financial goals and how much of a risk-taker you are in general.  

To help you ascertain your attitude to risk, you can find many helpful questionnaires online.

Sometimes, you may hear the phrase ‘capacity for risk’ or 'capacity for loss’. This refers to the amount of risk you can afford to take, based on your financial situation.

In other words, how much you can lose without negatively impacting your life. It’s determined by your income, assets, debts, dependents, and how long you’re likely to invest for.

Different types of risk

Inflation risk

Over time, the cost of everyday goods and services tends to increase. This is called inflation and it means you can buy less in the future with the same amount of money.
When you invest your money, you’ll need it to keep up with inflation at the very least.

Interest rate risk

Interest rates can be one of the main factors when pricing some investments. Therefore, a change in interest rates could mean the value of your investment decreases.

Capital risk

There are many different types of investments, including government bonds, property and fine wine. Capital risk applies to them all and means you may not get back what you originally invested.

What do you know about investment risk?

This refers to price fluctuations that affect the whole financial market, such as share prices falling, economic conditions, geopolitical events, or an unforeseen crisis.

What do you know about investment risk?

When investing, there’s always a chance your investment won’t deliver the expected returns.

How can we manage risk?

Investing is for the longer term, typically three years or longer. This gives you time to ride out the ups and downs of the market.

Generally, the longer you invest, the more time your money has to grow and the more likely you are to see positive returns - although this isn’t guaranteed.

Another way to manage risk is through diversification. It’s the same principle as avoiding putting all your eggs in one basket. Spreading investments across different assets, shares or even countries can help reduce risk. That way, if one or two make a loss, your total investment isn’t affected as much.

In summary

Different investments have different risks associated with them. Get to know what these differences are and understand what you’re investing into.

Choose investments which are aligned to your own attitude to risk, don’t put all your eggs in one basket and ensure you have time to ride out the ups and downs in the market.  

Finally, review your investments regularly to check how they are performing and if they still meet your financial goals.

Remember, your investments can go up and down and you could end up with less than you started with. Past performance does not guarantee future results. The information provided is financial guidance and should not be considered financial advice.