Investing
Myth-busting: investment risk
4 min read 8 Aug 24
It’s not surprising that many investors are cautious about taking on 'risk' with their money. But what if the biggest risk is misunderstanding risk itself? An overly cautious approach might make it difficult to achieve your financial goals. In this article, we aim to bust some of the myths about risk that may be preventing you from taking investment opportunities that could be right for you.
Myth 1: All risk is bad
Nobody likes uncertainty, but all investing comes down to accepting some level of risk. And one of the biggest risks in investing is misunderstanding risk itself.
Investors who try to completely avoid all risk could miss out on opportunities to boost their investment returns. Depending on your individual situation and plans for the future, taking on some risk could be helpful, even essential, in meeting your financial goals.
Take some time to think about your risk tolerance – how do you feel when you see your investment dip in value? Understanding how much risk you’re comfortable taking with your money is an important step in choosing an investment approach that aligns with your personal needs and situation.
The value of your investment can go down as well as up so you might not get back the amount you put in. Before making any investment decisions, it’s always important to do your research and think about the risks you are willing and able to take.
Myth 2: Risk means volatility
It can be easy to confuse 'risk' with 'volatility’. Investment risk ultimately comes down to one thing: the chance of losing some or all of your money when the time comes to you selling your investment.
Volatility, on the other hand, is a measure of how much the price of an asset (like equities or bonds) moves over time. It’s a natural part of investing, and constantly checking your portfolio’s performance can trigger unnecessary anxiety. While ups and downs in the market are expected, diversifying your assets could help to reduce the impact of a single investment’s performance on your overall wealth, should it drop in value.
Myth 3: It’s easy to diversify away risk
We don’t think risk should be confused with volatility, but it’s true that volatility can be unsettling. Diversifying your investment portfolio can help to smooth the journey. Diversification simply means spreading your investment to lower potential risk. You can diversify your investment by investing in a range of different assets or geographies, for example, so you won’t have all your eggs in one basket.
That said, while diversification is important, it’s also quite tricky to get right – which is why some investors choose to leave it to the experts.
Myth 4: Risk depends on the asset type
One of the most serious myths is that risk is static. For example, government bonds being low risk investments, and equities (company shares) being high risk. While past performance is not a guide to future performance, over the long term, equities have historically been more volatile and higher returning than bonds. But, there have also been several periods in which equities have underperformed bonds.
Risk depends on the price we pay for an asset in comparison to the price we sell it for. When investors begin to overvalue 'certainty’ and even consider one asset to be 'risk free', it’s often at its riskiest.
You can find out more about the risks to consider when it comes to investing in our jargon-free M&G Guide to risk.
The views expressed here should not be taken as a recommendation, advice or forecast. We’re unable to give financial advice. If you’re unsure about the suitability of your investment, speak to a financial adviser. If you don’t already have one, you can find one here.