Investing money and the risks
What to consider when investing your hard-earned cash
You don’t need an economics degree to be all too aware how low interest rates have been for the last few years. If you’ve got savings, it can be frustrating to see small amounts of interest added to your bank account. Savings accounts may have once been our go-to places to park our money, but these are very different financial times. That’s why more of us are waking up to the benefits of investing instead. But investing and saving are very different. The question is, can you invest without taking risk?
What is investing?
There are lots of different ways to invest, but what they have in common is that there is a risk: you may not get back the original stake you invested. That’s putting it quite bluntly, but the flipside is that if your investments do well, you’ll actually increase the value of the money you invested.
Saving is different. With a savings account you know you will get back all your money plus a return based on the interest you earn.
What can you invest in?
You can invest in all kinds of things, such as:
- Shares in individual companies.
- Bonds, which are essentially IOUs for loans. You lend a company or government some money and you get interest until the loan is repaid.
- Property, which can be residential or commercial.
- Commodities, such as gold, oil, coffee or even beef. Yes, really.
What should you be thinking about?
You need to think about investing carefully. The main risks are:
- You must be prepared to tie your money up for the medium to long-term. That means you should think about investing for at least five to ten years.
- The shares you buy can fall in value. You might think that only young or small companies would be risky, but it’s not that simple. Plenty of large companies have seen big falls in their share price.
- The company whose bonds you invest in can go bust or can’t repay the bond. Government bonds can be less risky than company bonds (although it depends on the country’s credit rating).
- Tax – successive governments have had a fondness for tinkering with the tax system. The risk is that the tax break that was available when you invested isn’t there when you cash it in.
- Currency – depending on your investment, the value of the pound compared to other currencies could affect your return.
- Liquidity – this is the risk that you won’t be able to sell the investment when you need to. It’s more of an issue with property than shares that are traded on a stock exchange.
Reducing the risk
You can never reduce the risk of investing down to zero, but you can take steps to reduce risk. Putting your money into a fund that buys shares in a range of companies is less risky than buying shares in just one company. Spreading your money across different types of investments (a mix of shares, bonds, property etc.) and different geographical territories should also reduce the risk further.
Being able to leave your money invested for a long time also reduces the risk. That’s because it gives you time for the stock market to bounce back if it falls sharply. I prefer to invest for a minimum of ten years but some experts say five or more is fine.
One of the main reasons that people lose money when they invest is that they cash in their investments after the stock market has fallen. Resist this temptation if you can! Bear in mind that investing is a marathon, not a sprint.
So if you are prepared to tie your money up for the longer-term, and are comfortable taking some risk, it is worth considering investing as an option.
Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.