Investments are designed to grow, but they can also go down in value. The likelihood of your investment losing value or having lower than expected returns is known as investment risk.
What’s investment risk?
No investment is entirely risk-free but the level of risk can vary greatly. When you invest, you use your money to buy an asset and expect that it will grow in value. But that’s not always the case. Sometimes your investment will have lost value at the time you want to sell it or returns are less than expected. Generally, those investments that have the potential to grow the most are also the ones that are more likely to lose value.
Understanding your risk profile.
Your attitude to investment risk will depend on a number of things. It’s partly about your personal attitude to risk, but you should also consider your investment goals and time frame.
A balance between risk and return.
Investors talk about finding a balance between risk and return. Usually this is about having a mix of different types of investments with varying levels of risk and return. This is known as diversification.
This is the old story about eggs and baskets. If you invest all of your money into one thing you may do extremely well. But you are also exposed to the risk of that investment performing poorly. That’s why experienced investors build a diversified portfolio. Because investments move up and down in value at different times and different rates, investment across different types of asset classes can help smooth out performance.
Time can help manage your risk.
Long-term investors can help manage their exposure to short-term ups and downs simply by waiting them out. If you have a carefully constructed and diversified portfolio it is more likely to increase in value over the long-term. But if it’s likely you’ll need to access your money in the short-term, it’s usually best to choose lower risk investments that are less likely to go up and down.