Investment risk is tightly linked to return. Not taking on sufficient investment risk can expose investors to other risks. If you own an investment property you will be aware that the return from the investment comes from two sources: income in the form of rent paid by the tenant, and growth in the form of an increase in the value of the property while you own it. Likewise from a share investment, an investor can receive dividends (income) and capital gain (growth).
Many investors who buy shares and property focus on the growth potential, with income being a beneficial addition. On the other hand, investments such as term deposits and bonds have as their main attraction the income return, with little or sometimes no possibility of capital growth.
When investing, risk is best thought of as uncertainty. For example, with a term deposit in a major bank you can predict with a high level of certainty what your return will be, and it is extremely unlikely that you will lose money. The level of risk is very low, but these days returns on term deposits are equally low.
Contrast that situation with shares. If you buy a share today you can’t be certain what its value will be in a year’s time. Because the return from shares is uncertain, they are considered higher risk.
That doesn’t mean shares are a bad investment. On the contrary, patient investors have been well compensated for taking on this risk. Property and shares are higher risk, but over the long term they have produced the highest returns. Cash and bonds are lower risk and produce lower returns.
Investors also need to take into account the risk of not achieving their goals. Generally, avoiding investment risk means your retirement savings won’t grow as much. In putting together a suitable portfolio investors should seek to achieve an appropriate balance of “growth” and “income” assets.
Please note that Trilogy Funds provides general information only and does not take into account any of your personal circumstances or seek to provide a personal recommendation to you. You are encouraged to seek expert advice before acting on any information contained in our resources.