What do we mean by risk? Put simply, a high-risk investment is one with the potential to rise or fall in value quite dramatically or quickly. A low-risk investment still has the potential to both rise or fall, but it will likely do so fairly gently or slowly. In other words, if the stock markets have a particularly good day, you stand to make more money with a high-risk investment. If the stock markets have a particularly bad day, you stand to lose less money with a low-risk investment.
You can tell how risky an investment fund is by checking the factsheet that comes with it – you should be able to find this on the website of your investment platform. Different providers use different scales so make sure you know what you’re working with (i.e. does risk level 4 mean 4/5 or 4/10 – high or medium risk?). You can also check independent risk ratings from companies like Morningstar – though these can be a little complicated for beginners to navigate.
Beyond helping you figure out how an investment might behave – jumping up and down a lot or staying slow and steady – what else is at risk? Lewis Grant, Portfolio Manager at Hermes Investment Management, shares an important point of view:
“The risk with investing is that you can lose your capital or fail to make the returns you’re aiming for. If we extend that to more holistic returns – so thinking about some of the environmental and social issues – then risk is also that you manage to make a huge amount of money but destroy the world in doing so. So you’d get to retire in a wasteland full of extreme storms and unbearable temperatures and you can’t actually enjoy that wealth.
“When investing, we need to think about it more holistically so we can make the world a better place at the same time as maximizing your living standards within that world.” This is why sustainable investing is so important.
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