What is the risk of investing?

Investing Risk

Let's be frank, there is not an investment type in the world that doesn't come with risk. Risk refers to the potential for the value of an investment to drop below its expected performance. And unfortunately, there are no crystal balls to predict exactly when or why this could happen. At any one time, there are a number of things that could affect an investment.

By way of example: You could buy a property to let, struggle to find tenants for a long period of time, then have a bad non-paying tenant you can't evict, have floods knock over a boundary wall etc. etc. You get the picture. You can't avoid risk.

On the flip side, investing in something which is considered higher risk over a long period of time is often associated with potentially high returns. Stocks, which are considered to be high risk investments, have historically delivered much better returns for investors who have long time horizons because they are able to ride the ups and downs of the market out.

Plot twist: What is the risk of not investing?

Keep your money under a mattress or in a savings account and prepare to watch it get slowly gnawed away by inflation. Current market predictions show that inflation could eat away at just under 70% of your money’s value in two decades. Eek!

The fear of getting older and readying yourself for some well earned down time only to realize that you have not taken enough risk to afford yourself a comfortable retirement may just trump the fear of taking that risk to begin with.

Figure out the risk you’re comfortable with

We’re human, which means we’re made of the squishy stuff: Flesh, bones and emotions. There’s no use in investing in something that carries a high risk, and then losing sleep when its value takes a temporary dive. That’s the kind of scenario that may cause someone who is totally uncomfortable with risk to panic and sell out of an investment before it has a chance to recover and potentially deliver high returns.

Everyone’s investment risk appetite is different. There’s a bunch of things to consider, like the amount of money you have to invest and the period of time with which to invest it. So when you are making an investment decision it's important to operate within the range of risk that makes you feel most comfortable.