Learn About Investing

Learn About Investing

What is the risk of investing?

Risk, and how to handle it, is at the heart of successful investing.

Handling risk plays an important part in the context of investing and there are various levels of risk associated with different types of investment.

If you’re saving cash it’s generally pretty safe in the bank. Your savings may lose value (if your interest rate fails to keep pace with inflation), but changes in value up or down tend to be gradual.

If you invest in other assets, like shares or bonds, the value of your investment can swing down as well as up. This means you may not get out what you put in. It is generally accepted however that the greater the risk you take, the more reward you’ll potentially receive – with a focus on the word ‘potentially’.

You may not ever eliminate risk, but there are ways you can try to manage it:

Diversification

Diversification means spreading your investments broadly. The more you diversify your assets the less likely one single event (e.g. a massive drop in shares from one particular sector or a particular country) will affect the overall value of your investment.

More on diversification

Volatility

Volatility refers to the rate and extent to which the price of an asset (e.g. shares and bonds) rises and falls over time.  Although the peaks and troughs can be very disconcerting and uncomfortable at the time, so as long as the long term trend is up, the significance of individual peaks and troughs starts to look smaller over a longer period – like five years or (ideally) more.

Cost price averaging

This technique involves investing a fixed amount of money on a regular basis (say £50 each month). This means more assets – like shares – are purchased in a month when prices are low and fewer when prices are high. It lessens the risk of timing the market badly – for example by investing a large lump sum in shares just before a sharp decline in the market.

More on cost price averaging