Invesment risk – what to think about
Everyone seems to be talking about risk at the moment. With covid retreating (in the UK as a whole at least), many decisions, from whether to go to a restaurant, to where we might go on holiday involves some thought about what the covid risks are, and whether we feel it’s ‘worth it’.
Some people don’t mind taking a risk, will be willing to take a long haul flight somewhere exotic, others would prefer to stay at home, get their food delivered to them by a nice man in a Tesco van, and see what box sets are on Netflix.
The same sort of thinking should go into investment risk. Is it ‘worth it’?
Well just like visiting restaurants and going on holiday, everyone has a different view. There are those who don’t mind taking a risk, and seeing a stock market falls reported on the BBC won’t phase them, happy with the knowledge that it’ll come back at some point.
After all, statistically speaking, it certainly should, we just don’t know how or when. Others would be terrified to see even a small drop in the value of their portfolio and are much happier holding cash in the bank or building society.
I’m certainly no expert on covid 19, and we’ll all come to our own decisions, but here are 4 quick thoughts, on investment risk.
4 thoughts on investment risk
Types of risk
Whilst covid is a largely single risk; that of catching the virus, and can be analysed as such, investments have many different types of risk, such as;
- Inflation risk; the chance of the value being eroded in real ‘purchasing power’ terms
- Liquidity risk; the chance of not being able to access funds, and
- Capital risk; the risk of the value going up or downAll money or investments have some risk. Even stuffing money under your mattress has the risk of being stolen, and cash in the bank has a very high risk of being eroded by inflation.
Everyone’s risk preference is different, and sometimes risk is to be embraced, sometimes not. It will always depend on your own individual circumstances.
We all know the obvious; in the long term, the higher the risk, the higher the reward. Whilst there are no guarantees of course, cash will eventually be beaten by inflation, but a pure stock market investment will normally make higher returns in the long term.
So what can we conclude?
- Talk about risk with your adviser; it’s important they understand what you want.
- Think about how long you are investing for; if it’s a long time, it can be easier to ride out rises and falls.
- Finally, be comfortable, sleep well, whether you are a low or high risk investor, it’s unlikely to benefit you looking at the value every day. Every few months is plenty. Spend that time thinking about going on holiday or having a meal out instead.
So have a think, and get in touch with your adviser if you want to talk.