|Risk is complicated and personal
to you. Do not be afraid to question what your advisers mean
Why does it matter?
Because you get rewarded with higher returns
for taking on more risk. It is as bad to take too few risks as too
many. See Risk
...... multi-dimensional. It could be:
- Inflation risk - the risk that your money
will not buy what you thought it would.
- Income risk - the risk that your investment
income will change.
- Default risk (or capital risk) - the chance
that you will fail to get back all or part of your capital.
- Liquidity risk - the chance that you will be unable
to sell your investment when you thought at the price you expected.
- Ownership risk - the chance that someone
else has rights to what you thought was yours.
- Flexibility risk - the inability to adapt
your investment to new circumstances.
Each dimension is to some extent measurable.
You can have high or low inflation, high or low default risk, you
can be locked into investments for a short or long time.
Each dimension has a time factor. Some risks
increase with time - default risk for example. Some risks decrease
with time - risk of returns falling below a threshhold, for example
(you'll have to trust us on this).
Each dimension has high or low importance for
you. Depending on your circumstances,
your plans and your
risk tolerance. Only you can decide
whether an investment is more or less risky for you.
A word on volatility
In technical investment circles the word 'risk' has come to have
a precise meaning - namely 'volatility', or 'the tendency of things
to swing about'. There are good reasons for this - in fact it has
been an enormously productive insight that has spawned much research,
heavy mathematics and opportunities for new financial products.
But it is, as we have seen, only half the story.
If this sounds more complicated than you thought, it is supposed
to be. It is to warn you against statements about
risk in investment literature which can:
- be over-simple (what does 'reducing risk'
- claim more than they can deliver (......will
- ignore the personal side
Luckily, savers have a standard weapon to attack
most forms of risk: diversification
. Use it!
A teaser to finish
Since 1869, the stock market has out-performed
the returns from cash in over 97% of rolling 10-year periods. So,
for you, are equities riskier than cash? (Hint: there is no right