There’s always some element of risk involved in investing. The associated risk can be higher or lower depending on the type of investment you choose, but it’s never zero.
In the investing world, a low risk investment will usually be more stable and generate lower returns while a high risk investment will often be more volatile and may result in higher returns.
When the amount of profit is greater than the initial investment, your investment can be said to have given you positive returns.
Investing is different from a savings account as your money can be invested more widely than just your bank. With investing, money is usually put into into things like businesses. As they grow and earn money, your investment grows with it. However, if a business does poorly or fails then you might earn less or even lose the money you invested.
Can I manage risks in investing?
There are ways to manage risks in investing.
- Take a long-term view and making sure you’re only investing money you won’t need in the next 5 years. This will ensure you don’t have to sell off your investments for a big ticket item like a house deposit.
- Have a fully funded rainy fund (also known as an emergency fund). Having a cash buffer (preferably in a high-interest savings account) means you have money for emergencies and unexpected expenses without having to sell your investments, possibly at a loss.
- Diversify. Don’t put all your eggs in one basket and bet everything on just one stock (or worse, crypto!). Make sure you’re invested in a range of asset classes, geographical locations and sectors and industries. A ready-made portfolio, like we have at Octopus Money, does all of that for you.
With investing your capital is at risk. Your investments may go down as well as up, and you may get back less than the amount you invested.
