- 5th Jun 2015
Myths of investing #1: But isn’t investing a bit high risk?
Well yes, it can be. But it doesn’t have to be.
When someone mentions investing, what comes to mind? Individual company shares that could make you a millions or bankrupt you in a week? Bankers wearing braces? Leonardo DiCaprio as the Wolf of Wall St?
Maybe it’s all of them or maybe none. But investing doesn’t have to be this common cliché.
Holding cash and investing in the stock market have a perception of being polar opposites – one being essentially risk free and the other being the high risk option. But this zero to a hundred view isn’t necessarily an accurate one.
The problem with risk is it’s exciting. It can be glamorised. A film where an investor puts his money into a moderately risky and diversified portfolio doesn’t have quite the same appeal for the audience.
Of course, investing will carry a level of risk. Risk is inherent to the process and to the stock market. Investors accept a risk premium in return for potential growth – growth in excess of what you would expect from an essentially risk free option such as cash or government bonds.
But the important point that can sometimes fall by the wayside is that you can have a degree of control over the amount of risk you undertake – it doesn’t have to be 10 out of 10!
Investing is more than just individual shares. There are a number of different types of asset a potential investor can use, and all with varying levels of risk. Finding and building a portfolio of investments that match both the risk you WANT to take and the risk you are ABLE to take is of paramount importance. Everyone will have different personal circumstances and attitudes to investing, and as such the level of risk that should be undertaken by each person will differ.
Risk and return are positively correlated; high risk generally means high potential returns. Most people are rational in the sense that they would choose the lower risk option if the expected return in two scenarios was the same.
Perhaps in the future – with some further financial education and development – when someone mentions investing it will be a balanced and diversified portfolio, assembled to an appropriate risk level, which will come to mind.
While investing can be very high risk, it can also be moderately high, quite conservative, or perhaps really low risk. It’s up to you. What is risky, regardless of the type of investor you are, is having a portfolio that isn’t right for you. Risk is subjective and therefore investing needs to be too.
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Any news and/or views expressed within this article are intended as general information only and should not be viewed as a form of personal recommendation. This article is not directed to, or intended for distribution or use in, any jurisdiction where such distribution would be prohibited. To the extent permitted by law, Wealth Horizon accepts no duty of care or liability for loss occasioned to any person acting or refraining from acting as a result of any material contained within this article. Where past performance is shown, this should not be taken as a guide to future returns. Investment in the stock market is not a suitable place for short term money. The value of investments and associated income may go down as well as up and you may not get back the full amount invested.