At Sterling and Law, we understand the complexities of investment risk and the opportunities it presents. But what is investment risk and how could you make the most out of it?
What is considered risky is different from person to person. Some people enjoy skydiving, while others could think of nothing worse. The same is true for investments.
Investment risk video
What is investment risk?
Investment risk refers to the uncertainty or potential for financial loss associated with an investment. It stems from various factors such as market fluctuations, economic conditions, and specific asset characteristics.
Investors face the risk that the actual returns on an investment may differ from expected returns, leading to financial consequences.
Common types of investment risks include market risk, credit risk, liquidity risk, and geopolitical risk. Diversification, thorough research, and risk management strategies are employed to mitigate these uncertainties and optimise investment outcomes.
What are the different asset classes?
Risk is linked to most types of Investments, and these are called asset classes. There are four main asset classes:
- Fixed income or bonds
- Equities or shares
Let’s take a look at each
Cash or money on deposit at a bank is considered the lowest risk investment – it also has the lowest potential return. Cash however isn’t entirely risk-free because it could be subject to the bank going bust. And, with such low returns, cash has little chance of keeping pace with inflation.
Bonds provide a fixed rate of income in return for Lending money to a government or company and they are generally perceived to be less risky than shares.
Alternatives are just that anything that isn’t cash, bonds or equities. An alternative investment refers to a financial asset that falls outside the traditional categories of equity, income, or cash. Examples of alternative investments include private equity or venture capital, property, commodities, and tangible assets.
Equities and shares
Equities or shares are generally considered to be the riskiest of the asset classes as they offer no guarantees, and your return is subject to the performance of the companies you are invested in.
History suggests however, that investing in shares is the most reliable way to grow your savings and beat inflation over the long term.
Company shares or equities and the various asset classes mentioned earlier are diverse and so they have different levels of risk and reward.
Diversifying your investment portfolio
While a small startup may have a higher potential for growth it’s likely to be more unpredictable than a household brand seeing a steady demand for its product. As a result, instead of relying on the success of one company or asset class, it would make sense to spread your investments across a mix of companies, asset classes, and geographic locations.
This strategy of diversifying could give you growth potential with reduced risk.
How do we work at Sterling & Law?
At Sterling and Law, we outsource the picking and choosing of Investments to experts in their fields While long-term investment strategies aren’t as exciting as shorter term ones, they tend to be much less risky and potentially more profitable.
It’s safe to say everyone has their own attitude to risk that’s why your Sterling & Law financial planner will help you understand what level of risk is right for you and your investments.
It’s important to remember to think long term for the best results. With that taken care of, your financial planner can concentrate on helping you build your wealth and achieve your personal and financial goals.
Related services from Sterling & Law
If you are thinking about working with a financial planner, we offer a broad range of services to meet the needs of a diverse range of clients including:
To discuss your requirements with an experienced adviser, call 020 3740 5856 to request a callback.