Understanding investing risk
Learn about risk and how managing it is key to your investing journey.
Generally speaking, risk is the chance that something we’re doing goes wrong, so we need to consider the risks when choosing whether or not to do something – like investing. When we invest we’re taking a risk that it won’t go as hoped and we lose money, so we need to look at the risk of that when making our investment decisions. It’s also helpful to know what level of risk we’re open to (our ‘risk appetite’), so it’s easier to make those decisions as they come up. But risk really isn’t all bad and where there’s risk there can also be reward. It’s all a balancing act, as we’ll see! ⚖
What’s the risk? 👀
Investing your money can be riskier than stashing it away in a savings account. That’s because the value of investments can go down as well as up, so you could get back less than you invested. Whereas with cash savings (providing they’re covered by the Financial Services Compensation Scheme) you’re almost guaranteed to get back what you put in, plus a little extra in the form of interest.
But putting cash into investments has historically beaten returns seen from savings over the long term and has the potential to beat inflation too. And, although previous performance of investments doesn’t tell us how they’ll perform in future, you’re likely to be better off by investing your spare cash over time. So while the risks of investing are real, it’s also important to remember the potential rewards.
With risk, knowledge is power 💪
You’re here because you’ve either started investing or you’re planning to start, and it’s important to begin your investing journey like any major journey: by considering the risks. If you understand the risks of investing, where to find more information about the risk of specific investments, and you know your own attitude to taking risk – then you’ll have the knowledge (and power) to manage it.
With Dodl, you’ll always have the risks pointed out to you but, because no advice is given, you’ll have to decide if you’re comfortable with the risks by yourself. If you’re ever unsure about the risks involved, you should talk to a qualified financial adviser. Check out MoneyHelper for more info on how to find one.
Know about investment risk ☝
Investing not trading
“Time in the market, not timing the market” is a turn of phrase commonly used in the investing world. What it means is that those who buy and hold investments over an extended period tend to end up better off than those who attempt to ‘play’ the market ups and downs by trading their investments regularly.
Dodl isn’t a trading app, it’s an investing app. It’s meant for those who intend to buy and hold investments for the long term, to maximise their chances of growing their hard-earned cash. 📈 And, small reminder, when we say the “long term” that is a minimum of five years – but generally the longer the better.
The two Rs: risk and return
Here’s a good place to introduce the general relationship between investment risk and ‘return’ – that is how much money you could make on an investment. Typically, the higher the potential return of a particular investment, the higher your risk of losing money on it.
The relationship between risk and return is a helpful rule to keep in mind when choosing your investments. But it’s important to remember that no investment is risk-free, and returns aren’t guaranteed.❗
Different types of investments have different levels of risk (and potential returns)
There’s not just one type of investment with one level of risk, there’s quite a few different types and each vary in how risky they are and how rewarding they could potentially be. In the getting started series different types of investments are introduced – including all the ones you’ll find with Dodl.
Risk-management hacks 😎
1. Know your investments 📈
Always carry out your own research when choosing your investments – read key details like a fund’s key investor information document (KIID) and understand the investment charges and performance - but also remember that past performance isn’t a guide to future performance. All of this info will be provided with Dodl but it is up to you to read and understand it. The more you understand your investment and its risks, the more in control of your investing journey you’ll feel.
2. Know your own attitude to risk ✔
This can be a powerful tool in your investing toolbox! If you can identify how you feel about taking investment risks and what your limit is, you can make your investing journey more comfortable.
Perhaps you’re a cautious type who would prefer a steadier ride and happy to forgo potentially higher returns for this? Or maybe your attitude is more adventurous, and you’re willing to go through more ups and downs if that could mean greater returns on your investment (over the long term of course!). Or you could be anything in between! Knowing yourself in this way can prove super helpful when choosing your investments.
3. Have you got the time? 🕙
The length of time you’re investing for can help determine how much risk you should take with your investments: typically the longer you can invest for, the more risk you can afford to take. Remember, time in the market tends to beat timing the market!
4. Diversify your investment portfolio 🥚
You wouldn’t put all your eggs in one basket, so why put all your money in one kind of investment? By having a range of different kinds of investments (range of investment types, themes, sectors and regions) you’re not risking losing all your money when one of them takes a tumble – so you’re reducing your risk without sacrificing your returns. This is essentially what well diversified funds aim to achieve. If you invest in individual shares or themed funds with Dodl, remember the importance of diversification in reducing your risk when choosing your investments.
So investing involves risk…
But risk isn’t to be avoided at all costs. The point is that investment returns come with risk, and if you’re always avoiding the risk, you’ll always be avoiding the returns. 📈 Knowing about risk and how to manage it can help you make your investing decisions with confidence.
You don’t need to remember all of this info right now, though it’s good to feel like you’ve understood the role risk plays in investing at an early stage. Dodl will remind you of the relevant risks all the way through your investing journey – to make sure you’re always going in with your eyes wide open.
🔔 Remember, investing carries risk and nothing in this article should be taken as advice - Dodl doesn't give advice, but we do hope the info is helpful!