None of us like to take risks with our savings, but the reality is that there’s no such thing as a ‘no-risk’ investment. You’re always taking on some risk when you invest, but the amount varies between different types of investment.
If you understand the risks associated with investing and you know how much risk you are comfortable taking, you can make informed decisions and improve your chances of achieving your goals.
As a general rule, the more risk you’re prepared to take, the greater returns or losses you could stand to make. Risk varies between the different types of investments. For example, funds that hold bonds tend to be less risky than those that hold shares, but there are always exceptions.
Losing value in real terms
Money you place in secure deposits such as savings accounts risks losing value in real terms (buying power) over time. This is because the interest rate paid won’t always keep up with rising prices (inflation).
On the other hand, index-linked investments that follow the rate of inflation don’t always follow market interest rates. This means that if inflation falls, you could earn less in interest than you expected.
Inflation and interest rates over time
Stock market investments might beat inflation and interest rates over time, but you run the risk that prices might be low at the time you need to sell. This could result in a poor return or, if prices are lower than when you bought, losing money.
You can’t escape risk completely, but you can manage it by investing for the long term in a range of different things, which is called ‘diversification’.
These are just a couple of the many examples of the types of risk we often come across. To discuss other areas that can be affected by risk why not get in touch? Call 0808 168 5866 or email firstname.lastname@example.org