Why is investment risk important?
Whether you’re investing with a goal in mind, or simply saving for retirement, it’s important to understand risk. Specifically, you should understand your own attitude to risk. Some people are happy to live with calculated risks if it means the chance of a higher return in the long run; others don’t want to lose money under any circumstances. But being highly risk-averse can itself cause you to lose money. Here we explain the different types of risk, whether you should be concerned and what you can do.
What are the risks of different investments?
The four main asset classes are cash, bonds, property and shares (equities), none of which are risk-free.
Cash is the least risky of the four but it tends to deliver low returns, which means the value of your money can be eroded in times of high inflation (see ‘Inflation risk’ explained below).
One step up the risk ladder are government bonds, or gilts, followed by investment grade corporate bonds, where you effectively lend money to large companies in exchange for a fixed rate of interest. High-yield bonds, also known as 'junk bonds', are an even riskier option because they deal with companies seen to have a high risk of default.
Investing in commercial property, such as offices, supermarkets and warehouses, can grow your money through rental income and growth in the value of the property you own, but can be illiquid - meaning it can be hard to sell if you need to access your money.
Shares, also known as stocks or equities, are seen as the riskiest asset class, as stock markets can be highly unpredictable. But some markets are considered riskier than others. Investing in developed markets such as the UK and the US is considered relatively safe compared to other equity markets, although these contain their share of higher risk options, too, while emerging markets (such as Brazil, China and India) equities are likely to be more volatile. Buying shares in geographical regions less-frequented by investors can be expensive and the shares can be comparatively illiquid.
Other types of investment are available, such as in commodities, cryptocurrencies and start-up companies, but you should be extremely careful with these. Scammers often use promises of rewards to lure in victims, while even genuine investments can be high-risk. Use the FCA Warning List to check any investment ‘opportunities’ you may be offered.