If you’re someone who is risk averse, then the world of investing can seem frightening. Investment products often carry a warning specifying that the value of what you put in can rise as well as fall, and there are horror stories all over the media about people losing their life savings in a botched investment. At the other end of the spectrum, taking on too much risk could leave you in trouble if the market turns against you. This article will explain what the difference between the two modes of thinking are, and how an appropriate balance can be struck.
What’s the difference?
As this article will go on to explain, it’s not quite as simple as splitting the investment world into categories of “totally safe” and “totally risky”. However, in general, “safe” investments are ones that have only a very low chance of not delivering returns, such as annuities and government bonds. Usually, though, they have a lower potential yield. “Risky” investments, such as collective investment schemes or contracts for difference (CFDs), tend to pay out more if the investment goes well.
Striking the balance
Diversification is often touted as the best way to manage these risks. Say you have £100,000 to invest: by putting £25,000 in investments judged to be risky and the rest in those judged to be safe, you’ll be spreading your investment power around while still preserving the chances of a big profit. Another way to mitigate the worries involved in investing in a risky product is to do your research. By using The Hammerstone stock analysis and reading expert tips, you’ll hopefully be able to reduce the chances of losing cash – though, of course, nothing is ever guaranteed in the world of investing.
The wider context
It’s important, however, to keep everything in context when making a decision about the relative safety levels of a particular investment or trading vehicle – and to spend some time defining the words. Only a few investments are ever truly “safe” in the sense that you’ll always get out what you put in, and it’s not necessarily the case that you’d be protected in the case of the provider going under. In fact, many different types of investment account aren’t looked after by the Financial Services Compensation Scheme.
While the terms “risky” and “safe” are indeed helpful for judging the different actions you could take, it’s also important to make judgements about the costs of inaction in the same terms. Leaving your cash in a simple savings account may seem safe in that it can’t be lost, but the value of it can go down substantially over time as the effects of inflation eat away at it – perhaps to a larger extent than any losses on a more risky investment might have done.
In sum, it’s clear that the dichotomy between “risky” and “safe” investments isn’t as clear-cut as it might first seem. While there are clear risks involved in some trading instruments, so-called “safe” investment vehicles can often end up being risky for inflationary reasons. However, the good news is this: there are actually lots of ways to strike a decent balance between safety and all-out risk, including doing your research and ensuring that you diversify properly.