What do you think about when you see the word RISK?
It can conjure up all sorts of horrible images and thoughts right? It may even make you want to back. away. slowly. before running out the door!!
And you wouldn’t be wrong. The work “risk” literally means:
“the possibility that something unpleasant or unwelcome will happen”
Risk however needs to be put into context.
For example, the lifetime risk of being killed in a car accident in the UK is 1 in 240 – sounds high right? For every 240 car accidents, 1 results in a fatality.
But compare this to:
US – 1 in 82
EU – 1 in 137
France – 1 in 158
And it suddenly doesn’t seem so bad…
You also need to appreciate that this is blanket risk for the whole of the UK – I bet it will be worse in rural areas where it takes ages for someone to be rescued, versus urban areas where it’ll be easier to get to someone.
Risk doesn’t have to be feared when it comes to investing – in fact we need to learn to live with risk in order to invest properly.
What Is Investing Risk?
Risk warnings for investing are EVERYWHERE – even my website. It’s because it is such a highly regulated activity, and nobody wants to get sued (understandable). But is the terminology putting women off from investing? I think it might be.
Think about it – if you want to start investing, you do a little reading, then approach the website. Risk warnings are plastered everywhere, it all seems really overwhelming and confusing, and it immediately puts you off. I get it, because I’ve had the same feeling.
But investing risk can be seen as a continuum on a spectrum. Something that is risky one year, might be better the next. Also, you can never say anything is ever “no” risk. If someone ever does say an investment is, then don’t believe them!
Even cash can be risky in the wrong context.
Hang On – Why Is Cash Risky?
Cash is risky if you just rely on this for your retirement. Sticking money in a cash ISA is all well and good now, but over time INFLATION will eat at your savings and make it worth less than you intended. If you’ve ever come to one of my sessions then you’ll know that it’s called the “freddo effect” – how the price of a freddo keeps going up over time for the same product.
Don’t get me wrong, having money in an emergency fund is an excellent idea AT ALL TIMES, but this will need to be periodically topped up as you earn more income, and as life generally gets more expensive.
The bottom line is, in order to beat inflation, you will need to take on risk by investing some of your money.
How To Think About Investing Risk
Think of it as “levels” of risk. The higher the level, the more chance of a greater reward, but also the higher chance of losing money too (which is why you don’t invest every penny you have!).
Low – cash, premium bonds
Medium – government bonds, corporate bonds
High – stocks and shares, property, one-off special investments, [bit-coin]
But even within these layers are different levels of risk – “risk within risk” if you like!
Take property for example – a buy to let is risky yes, but a house of multiple occupation (HMO) is riskier because you have many more tenants to manage.
A fund of shares in a developing country with an unstable economy will be more risky than a fund of shares in an estabilished economy.
But it’s all still “risky” – you just have to put it into context.
How To Manage Risk When Investing
There are several things you can do to manage your own risk when it comes to investing.
Often the reason why some many people are put off from investing is because they are fearful. And they are fearful because they don’t yet know the steps to take to start. It can look like an overwhelming and complicated mess!
So getting some education around investing is cruicial before you start. It will reduce your anxiety and help you to feel confident in your choices. You will understand the risks you are taking and get that it’s ok!
Book a 15-minute stratregy session with me and ask me how I can help with this.
Diversify your portfolio
Have a bit of everything and a bit of everywhere in your investment portfolio (collection of investments). You can have some cash, some bonds and some stocks and shares in funds. Then you could pick funds based on country too. Perhaps you’d also like to have property in your portfolio.
As long as you diversify based on how much “risk” you can tolerate, then you’ll be mitigate the swings to a certain degree.
Understand where you are
If you are a year from retirement, putting all your money into high risk strategies is a very risky idea. What if the stockmarket crashes right before you want to leave work and you lose 30% of your portfolio overnight?
But if you’re 18, having a high risk portfolio design is ok, because you are many many years off of retirement.
So know where you’re at on your wealth journey. When do you want to retire? How much money do you need? This will help you to determine how risky you can afford to be.
Understand who you are
If even after education you are still a nervous nelly when it comes to investing, and the idea of the stock market dropping even a small amount gives you sweats and shakes, then it doesn’t sound like investing is for you. Stick with premimum bonds.
If on the other hand, you’ve got some education, understand the risks and are willing to embrace them, it sounds like you’d be ok with the ups and downs of the stockmarket!
So knowing who you are is cruicial. You can do this “attitude to investing risk” quiz to find out yours!
Don’t keep checking
One of the biggest risks is checking constantly. This is a really easy way to make snap judgements and decisions based on EMOTION rather than the STRATEGY.
So don’t keep checking – yes I know it’s fun at the start and really really nerve wracking, but the more you check, the more likely it is that you will start to fiddle, and this will waste precious money and energy!
Investing is risky yes, but it isn’t to be feared. In fact, we are rewarded for taking on risk, and these rewards can help us to beat inflation and fight the freddo effect.
So next time you see those risk warnings, don’t be scared. Remember that it is part and parcel of investing, and the more you learn, the more confident and in control you will feel.
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