Investment – how real is the risk?
I have yet to meet an investor who hands over their hard-earned money and says, “invest it in a high risk investment, I love to take chances.” Unless one is talking about cryptocurrencies, but that’s a whole different story.
A cornerstone of investment planning is that of investment risk, and the financial services industry goes to great pains to get clients to understand these concepts, particularly the fact that the greater the risk, the greater the potential return.
To protect clients and ensure some level of understanding, one of the tools used in the investment process is that is a risk assessment. The client answers some questions, and, based on this, is deemed to have a certain risk profile. This will then logically lead to where this client’s money is invested – in a fund or funds according to their risk profile. So that, quite frankly, if the client turned around in future and was not happy with where money was invested, there is some paper evidence that the decision was made on information supplied by the client.
What this risk assessment processes misses by a mile is that many clients don’t understand the questions fully and most would answer in a rather conservative way. Any adviser worth his or her salt would know that if a client has a long term investment horizon, a very low risk investment may not be in their best interest, despite what a few questions on a piece of paper indicate.
The ultimate “safe” investment is a bank account – you are guaranteed your capital back at the end of the term and your interest is specified upfront, so you know what growth you will get. On the other end of the scale, an equity based investment such as investing directly on the stock market, or via unit trusts, is high risk and you have no guarantees.
You won’t get rich putting your money in a bank account. Research has shown that doubling your money will take nine years if you invested in equities, and 92 years if you invested in cash!
So where does that leave investors? Well, you need to take a little risk to get come reward. If your goal is short term and you need might need ready access to cash, put some money into a bank account or money market account. If your goal is longer term to grow your wealth, then take a bit more risk, irrespective of your own fears around losing money.
Remember, there are no guarantees in life, and the same is true for investing. No-one can promise you a pot of gold at the end of the rainbow, but getting good advice from a professional and regularly reviewing your investment progress, will go a very long way to ensuring success. Millions of people have walked this path and been successful. Are you one of them?