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!
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.
The more you are hoping for in returns, the more risk you will have to take.
The more risk you take, the higher the chances are of you making a loss, especially in the short-term.
Set an investment target. Whether it is your retirement or a new car, work out how long it may take to achieve as this will affect how much risk you can take.
Do not invest money you need for day-to-day spending or short-term requirements such as your rent, mortgage payment or interest payments.
The further away your goal, the more risk you can take as you have a longer time to recover from any losses.
The old saying rings true: do not put all of your eggs in one basket. Having all of your investments in one fund creates more risk. Spread them out!
By joining The Big Exchange, you’re doing a lot more than making your money work harder for you and others. You’re helping to start a movement that aims to transform the lives of millions of people by building a fairer financial system that works for everyone.