You can invest directly in investments like shares, but a more popular way to invest is indirectly through an investment fund. This is where your money is pooled with other investors and spread across a variety of different investments. And this is done to reduce your risk.
One of the main things that you need to consider is that there are different types of investments.
None of us like taking risks with our savings, but the reality is there is 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 investments.
As a general rule, the more risk you are prepared to take, then the greater the returns or losses you could stand to make.
There are many different ways to access investment funds, such as through individual savings accounts or ISAs, workplace pensions, investment bonds, private pensions, or general investment accounts and there are many more.
You can also take different levels of risk for the different pots of money that you have. And that’s quite a good way of doing things. So if you’ve got a longer term goal, then maybe you can take a higher level of risk than you have with a shorter term goal, and it’s good to remember the money you place in secure deposits, such as savings, accounts, risk losing money in real terms. This is because interest rates paid won’t always keeping up with inflation and rising prices. Especially at the moment, because inflation is running at a very high level as we are all experiencing.
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 would have expected at the outset.
Stock Market investments might beat inflation and interest rates over time, but you also run the risk of prices being low at the time that you need to sell. This could result in a poor return, or if your prices are lower than when you bought them, you will risk losing some of your money.
You can’t escape risk completely, but you can manage it by investing for the long-term and in the range of different things, which is called diversification and we’ll cover that at another time.
You can also look at paying money to investments on a regular basis, rather than all in at one time on this will help smooth out the highs and lows and cut the risks of making big losses. We also know this as pound cost averaging.
When you do invest, you are exposed to different types of risks.
Capital risk is understanding your investments can go down in value and you may not get back what you invested originally.
Investing in stock market is normally through shares or equities either directly or via funds. The stock market will fluctuate every day in value sometimes by large amounts, especially when there are worldwide events or crises such as the pandemic financial crisis and what we currently seeing in Europe at the moment.
You can lose some or all of your money depending on the company or companies you have bought and other assets such as property and bonds can also fall in value. So don’t be lulled into a false sense of security that property and bonds don’t fall in value because they do from time to time and everything goes in cycles.
The purchasing power of your savings declines even if your investments increase in value. You may not be making money in real terms if the things that you want to buy with your money have increased in price faster than the investments have increased in value.
Credit risk is the risk of not achieving a financial reward due to the borrowers failure to repay a loan or otherwise meet a contractual obligation.
Credit risk is closely tied to the potential return on investment with the most notable being that the yields on bonds correlate strongly to the perceived credit risk.
You may be unable to access your money when you want to, because liquidity can be a real risk if you hold assets such as property directly, and also in the bond market where the pool of people you want to buy and sell bonds can dry up and it does happen. I’ve seen it many times.
You are likely to be more familiar with this one. Here, you lose money due to the fluctuating exchange rates in the country markets. And we see that just by buying set and currency. When we go on holidays
Interest Rate Risk
Changes in interest rates affect you’re returns on your savings. Even with the fixed rates. The interest rates in the market may fall below or rise above fixed rates, affecting your returns relative to the rates elsewhere.
Interest rates is also a particular risk for bond holders, which I’ve highlighted earlier.