Understanding investment risk
A beginner’s guide to navigating financial terrain.
The world of investments offers its own set of opportunities and obstacles. It's a financial terrain where risks and rewards are intertwined, demanding careful consideration and strategic planning.
We wrote this article to give you a good overview of risk when it comes to investments, but it’s not advice. If you’re not sure what to do about our colleague share plans, or any other investment decision, we suggest you seek financial advice.
Risk and reward: the core of investment
At the heart of the investment landscape lies the fundamental concept of risk and reward.
When choosing your path, the more adventurous your route, the greater the potential for discovery and achievement, but also for obstacles and setbacks.
In the world of investments, risk represents the uncertainty of returns. It's the chance that your investment may not perform as expected, and you may not achieve the financial goals you've set.
On the other hand, reward is the potential for growth and profit that comes with taking calculated risks.
Different asset classes
Investments come in different asset classes, each with its own level of risk and potential reward:
- Cash: think of cash as a stable foundation offering quick access to your funds. It's the least volatile but tends to provide the lowest returns over the long term.
- Bonds: bonds are essentially loans to companies (called ‘corporate bonds’ or governments (‘government bonds’ or gilts’). They can provide a steady income stream with moderate risk.
- Shares: shares represent part-ownership of a company. They come with higher risk but also the potential for more significant rewards.
Diversification: mapping your journey
The key to success often lies in diversification – spreading your money across different asset classes to manage risk. Diversification allows you to spread risk and capture opportunities in different markets and industries.
If one of your investments performs poorly, the chances are another will make up for it by performing well.
If you don’t spread your investments in the right way, you could find yourself taking on more risk than you bargained for. For example putting too much of your overall wealth in the shares of one company can be dangerous if that company falls on hard times and the share price drops significantly.
Don’t let inflation derail your journey
In your financial journey, there's another obstacle to keep in mind: inflation – the rise in the price of goods and services over time. Think of inflation as the relentless force of nature that erodes the purchasing power of your money over time. If your investments don't grow faster than inflation, your money may not stretch as far in the future.
Investing too conservatively can sometimes lead to the risk of your money not growing fast enough to achieve your objectives.
The key is finding the right balance – investing with a strategy that helps your money grow at a steady pace without taking on too much risk. Diversification plays a crucial role here, allowing you to navigate this terrain effectively.
Conclusion: mastering the financial terrain
Always consider the dual challenge of risk and inflation. Striking the right balance between caution and growth is essential to reach your financial destination successfully.
Our ShareSave and Buy As You Earn (BAYE) plans are designed to provide options that align with your risk tolerance and financial goals. These schemes offer you the flexibility to adapt your investment strategy as you journey toward your financial goals.
Finally, your pension journey deserves attention too. Assess whether your pension plan is on track to meet your retirement goals, and make necessary adjustments to ensure a secure financial future.
To check your pension’s on track, visit our benefits hub on the NatWest Group intranet.