Understanding risk

Risk

Risk is a scary word. Often, it makes us think of ‘loss’ - which no-one wants! However in investment, risk is an essential part of the process.

Many people don’t invest because they think it’s too risky, choosing instead to save in cash.

However, they often don’t consider the risk of inflation - or the rising cost of living - which over time eats away at the value of savings. If the amount you earn on your cash savings is less than the rise in the cost of living (inflation) then that means you are losing out!

What do we mean by Risk?

You may see the term risk used in different ways when you invest. However, it usually boils down to this: the lower the risk, the lower the potential return. The higher the risk, the higher the potential return.

Assessing risk is a way of trying to predict how an investment will behave, as well as how much it might make, or return. A UK government bond, or debt, for example, is considered very steady and a lower risk, so many investors earn less than 1% a year for buying one. In comparison, investing in companies in a developing economy like India is considered higher risk and so returns are often greater - but jump around a lot!

Ultimately, there is no such thing as a risk free investment. As a general rule, the longer you have to invest, the more risk you can take.

6 simple steps to understanding how much risk you can take

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