If there’s a secret to investing, it’s simply getting to grips with the risks – and the potential rewards – involved. You can calculate how much risk you’re prepared to take and choose suitable investments to help you achieve your goals.
If you’re new to investing, that might sound easier said than done. But it doesn’t need to be hard.
Here, we explain what we mean by risk and how it affects your investments.
Broadly speaking, investment risk is the possibility of losing the money you invest. There’s also a risk that you might not earn what you expect to.
The outcome of your investment is uncertain for a number of reasons:
It’s human nature to crave certainty. So why take a risk with your money? In a nutshell, it could give your money the chance to beat inflation, as investments have potential to increase in value over time.
You can’t have one without the other. The lower the risk, the lower the potential returns. The higher the risk, the higher the potential returns. Although, what you can expect and what you actually get may differ.
If you’d rather prioritise protecting the value of your money, you’ll have to sacrifice the prospect of greater returns. Finding the balance between the highest possible return and lowest possible risk will depend on your attitude to risk and how long you can invest for.
When you invest in funds, you’re investing in a ready-made basket of investments which contain a range of investment types – also known as assets classes.
The 4 main investment asset types that funds can invest in are:
Cash is typically considered the lowest-risk asset type, and shares/equities the highest risk.
Funds are assigned a risk profile by the fund manager, which gives you a good indication of how bumpy the road is likely to be. Funds with the lowest risk profile are the least volatile and funds with the highest risk are the most volatile.
If you’re a cautious investor, you may only want to take a small amount of risk to try and achieve a modest and relatively stable return. If so, funds with a low risk profile could be right for you.
If you’re comfortable taking a larger amount of risk with your money, you might want to go for funds that have a higher volatility to give you the potential for higher returns. If so, funds with a higher risk profile could be more suitable for you.
While investment risk can’t be eliminated, it can be managed.
You could spread your risk by putting your money in a range of investments. That way, if one loses money, it could be balanced out by your other investments – known as diversification. This can be an effective method of investment risk management.
The easiest way to diversify is to buy into a multi-asset fund, which contains many investments (rather than just one) so they can be less risky than buying individual shares in a single company.
Keep in mind – some funds are rated higher risk than others.
When a fund manager puts together a multi-asset fund, they hand-pick a mix of asset types to cater to a specific appetite for risk. Lower risk funds will typically be made up of cash and fixed interest assets. Higher risk funds will often feature more shares/equities.
Multi-asset funds are professionally managed to ensure that they maintain their risk level. This can make them less risky than investing directly in shares, whose performance is often at the mercy of unexpected events.
If you’re considering investing in a diversified portfolio, HSBC's Global Strategy Portfolios are multi-asset funds that cater to different appetites for risk. Whether you’re cautious or adventurous with your money, we have a portfolio that may interest you.
A longer time period is typically associated with lower market volatility and risk.
Investments should be seen as a medium to long term commitment. This means, you should be prepared to hold them for at least 5 years to give your money the best chance to grow.
Ideally, you should have an emergency fund – between 3 and 6 months’ worth of living expenses –before you start investing. That way, if the markets have a wobble, you won’t have to sell before your investment has chance to recover.
The time you have to reach your goals – known as your ‘time horizon’ – can also affect the level of risk you could take. The longer your time horizon, the more risk you can afford as you’ll have more time to recover from any market downturns.
When you’re young, for example, you can afford to place your retirement savings in a more aggressive portfolio. As you get closer to retirement, you may be more cautious with your investments as you’ll have less time to ride out any turbulence.
With a school fees fund, you’re saving for a fixed amount so you may want to be cautious with the risk you take. Whereas with a ‘Ferrari’ fund, the return is more important than the money so you could afford to go all-out adventurous here (one can dream, right?).
At the end of the day, it’s your money. You need to be fully aware of the risks involved so you can be comfortable with any risks that you decide to take.
As a general rule of thumb, you should only invest if you’re comfortable with a degree of uncertainty over the outcome.