Understanding investment risks

Investing will involve some element of risk, and, as such, cannot be avoided. The best the investor can do is to manage the risk. Here are four principles to help:

Number_1Invest in funds

A fund is handled by a fund manager who can spread the investment across different companies, sectors and, in some cases, regions. Similar principles apply to funds investing in properties or bonds. Since the likelihood of all of these investments going sour at once is low, investing in a fund can help to manage risk.

Benefits of investing in a fund:

  • The risk to the overall investment is reduced since there is no reliance on the fortunes of a single company, government or property.
  • The cost of investing in a fund can often be less than buying shares or bonds one at a time. This is because the costs are generally lower, the larger the sums involved.
  • An experienced fund manager can select and manage those assets on behalf of the investor.

Please note that prices may fluctuate and you may not get back your original investment.

Number_2Diversify

Just as the argument goes for investing in a fund, an investor’s portfolio should be a mix of investments. The investor may wish to build a portfolio that includes higher-risk investments, such as equities, and lower-risk ones, like bonds, property or even cash. That’s because different types of investments and individual bond or equity funds will go up or down at different times and at different rates. So the overall portfolio’s performance may be more consistent. The particular balance of the portfolio is likely to depend on the investor’s attitude to risk, their age and financial goals.

Number_3Invest for the long term

Ideally, the investor should plan to invest for the long term. Financial markets can experience bouts of extreme turbulence, brought on by catastrophic events or by erratic investor behaviour. Many investments have taken a tumble in the past, but historically markets have tended to go back up over time – which is why it’s best to take a long-term view. It is however worth remembering that past performance is not a guide to future performance.

Number_4Invest regularly

Investing at regular intervals can also be a good idea because markets rise and fall all the time. When the market price is low, a greater number of shares or bonds can be bought for the same money. At other times, when the market is high, the opposite is true. Buying continuously through the ups and downs means that the average price of the investment can be lower than if one lump sum investment is made. Of course, when the market falls, the existing investment will be worth less. But, over time, regular investments can help smooth out the market’s peaks and troughs.

The views expressed here should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of any investment, speak to an authorised financial professional or your bank.

The value of stockmarket investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. The level of any income earned by the fund will fluctuate. Please note that past performance is not a guide to future performance. Please be aware, your investment may increase or decrease as a result of currency fluctuations.

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