Risk – what you need to know

A voiceover talks over an animation running on screen. The animation compliments what is being said without adding any new information.

“‘Risk’ is one of the most frequently misunderstood terms among new investors. Let us show you what it really means and how you can use it to your advantage.

We know that when we say risk, you think ‘danger’. Crossing the road without looking, or getting in a cage with lions, are the actions of reckless people after all. But unlike these risks, investment risk comes with a potential reward.

If someone offers you £1 to climb onto the bottom rung of a ladder, you’d probably agree. You’d probably climb to the second rung for £2. But at some point, the risk of falling off outweighs the reward. And it’s where you feel comfortable in this balance between risk and reward that is your attitude to risk.

So how does this apply to you and your investment journey?

You can invest in any number of things. But when we talk about investing, we generally mean buying a small part of a company, a share.

If the company performs well, then you’ll make money. But if the company doesn’t do so well, you could have less than you started with when you come to sell it. This is investment risk.

Different types of companies will have different levels of risk and reward. Generally, the more risk you are prepared to take on, the better the potential returns. But just like with the ladder, you’re in control.

There are three ways you can adjust how much risk you take.”

1) Time

“The first is time.

Now, this is the big one. The longer you leave your money invested, the better chance you have of making money when you sell the investment.

But all investments, even the very best ones, go up and down in value over time. It’s why we say it’s important to invest for at least 5 years, as the odds get better the longer you’re in the market. Although, there is always a risk of getting back less than you invest.

The likelihood of you making money if you invest for just a day is around 50/50. But when investing for 10 years the probability increases to more than 98%. This is what’s happened historically, but things obviously change, so it might not happen in the future.”

2) Diversification

“However powerful time is, it’s much less likely to work if you have all your eggs in one basket.

So that leads us to diversification.

By this, we mean you shouldn’t invest in just one company – you need to have a mix. Different types of companies have different levels of risk and reward. For example, a small company just starting out, will have a tougher time than a large well-established business, but is more likely to experience significant growth.

A company selling products for which there is a steady demand might have smoother returns than one where demand depends on the health of the economy.

And equally some countries are steady and established while others are faster developing.

If you invest in a good mix of companies, you’re less affected by individual success or failures. A lot of people choose to do this by pooling their money with other investors in a fund, where the investment choices are made by an expert.

By doing this, it’s extremely unlikely you would ever risk losing all of your money, as the individual companies the fund manager bought would all need to fail for this to happen.”

3) Invest over time

“The third thing you can do is to spread your investments over time.

If you don’t have a large amount to invest all at once, this could also work to reduce your risk.

The company shares you’re about to buy could be more expensive or cheaper tomorrow, you’ll never know. Buying your shares in a series of smaller amounts over a period of time means sometimes they’ll be more expensive and sometimes they’ll be cheap. So you get an average cost over the period you’re buying. This helps protect you from investing all of your money on a really expensive day.”

Summary

“You’ll never have zero risk of losing some money. But investing in a good mix of companies, over a period of time, and then holding them for the long term dramatically reduces the risk of investing your money.

So you see, risk doesn’t have to equal danger. When properly understood, it can equal opportunity.”

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This video is not personal advice. All investments and income can fall as well as rise in value, so you could get back less than you invest. If you are unsure of the suitability of an investment or course of action for your circumstances, please seek advice. Past performance should not be seen as a guide to the future.”