It seems like more of us are now waking up to the benefits of investing as a way to try and grow our money, or at least try and keep pace with inflation. The question is: how can you understand the risks and rewards to decide if investing is right for you? Let’s have a look …
What is investing?
Basically, investing is when you buy something, like shares in a company, in the hope that its value increases over time.
There are loads of different ways to invest, but what they all have in common is there’s always a risk – you may not get back the amount you originally invested
The flipside is that if your investments do well, and their growth keeps pace with inflation, you'll increase the value of the money you invest.
If you’re happy to accept some risk in return for higher potential rewards compared to other types of saving, investing might be worth thinking about.
What can you invest in?
You name it. Here are just some of the things you can invest in:
- Shares in individual companies.
- Bonds (essentially IOUs for loans). You lend a company some money and you get interest until the loan is repaid.
- Gilts are a type of bond, but instead of lending your money to a company, you're lending it to the government. This makes it one of the less risky types of investment.
- Property (residential or commercial).
- Commodities such as gold, oil, coffee or even beef. (Seriously, the returns can be meaty.)
A popular way to invest in these things, or assets, is in a fund, where your and other investors’ money is pooled together.
The amount the value of an investment goes up and down is called volatility. Some investments are more volatile than others.
Typically, things such as shares have bigger ups and downs – this means higher volatility – and are more likely to result in bigger losses or gains in value.
Things such as bonds and gilts have smaller ups and downs – this means lower volatility – and are more likely to result in smaller losses or gains in value.
What risks should you be thinking about?
Whatever you invest in, there’s no getting away from it – your money will be at risk.
So, it’s super important you know what you’re getting yourself into and are comfortable with the level of risk you’re taking.
Here’s just some of the things to think about:
- Be prepared to tie your money up for the medium to long-term – at least three to five years. In the long term, you tend to make money from investing, whereas if you only invest in the short term you may be unlucky and pick a time when your investment loses money. So, you should try to avoid investing money you are expecting to draw on any time soon.
- Shares can rise and fall in value and generally can be more risky than other types of investments. This also makes funds that hold a large proportion of shares, also called equities, more risky.
- Bonds are typically less risky than shares. This also makes funds that hold a large proportion of bonds less risky. However, the company whose bonds you invest in can go bust or may not be able to repay the bond. Government bonds can be less risky depending on the country’s credit rating, which means they’re more likely to be repaid in the future.
- A tax break that may have been available when you invested might not be there when you cash in.
- The value of the pound compared to other currencies could affect your return. This matters where the companies you invest in trade internationally.
- You might not be able to sell your investment when you need to (more of an issue with property than shares traded on a stock exchange).
Can you reduce the risks in investing?
You can never completely remove the risk of investing – but you can take some simple steps to reduce it.
You could choose less risky investments or invest in a mix of things to ‘spread’ and reduce your risk.
Leaving your money invested as long as possible can be worth it in the long run too. Remember – investing is a marathon, not a sprint.
Our ready-made investment approaches do just this – they spread your risk across lots of different types of investments in lots of different countries.
Understand risk/reward with our Investment Mix graphic
Virgin Money’s experts have made it easier for you to choose where to invest by creating three growth approaches with a wide range of investments from around the world. These spread your risk and increase opportunities to grow your money.
