Why Investing is Risky?

Investing risk isn’t about losing money – it’s about uncertainty around outcomes.

Chipping money into that savings account is very safe, you will wake up the next day or 2 years later and the money will still be there. Unless a meteor strikes the Earth or Australia is taken over by crocodiles – both of which have a miniscule chance of happening – you can bet you’ll still have your money there. There is essentially no risk involved.

As humans, we fear risk and love to avoid it if we can – why take the uncertain route and an uncertain outcome if you can take the certain route with a certain outcome?
We also fear loss – losing our house keys, losing our favourite sunglasses, losing our hard earned money. We love the safety of ‘cash’.
We also fear complexity and can be overwhelmed – words and jargon like P/E ratios, dividends, bonds, index funds, ETFs can put us off looking into investing

Types of Investing Risk

There are different types of risk:

#1: Market risk

Risk the overall market falls- causing investments to go down

#2: Inflation risk

Risk that rising prices reduce the purchasing power of your money meaning your investment returns don’t keep up with the cost of living

#3: Interest rate risk

Risk that changes in interest rate negatively affect investment values

#4: Credit risk

Risk that the borrower fails to repay interest or principal, leading to a loss for the investor

#5: Liquidity risk

Risk that you cannot sell an investment quickly or without a significant price reduction when you need access to funds

#6: Concentration risk

Risk of overexposure to a single asset, sector, investment or market

#7: Longevity risk

Risk of outliving your savings, particularly in retirement due to living longer than expected

#8: Foreign investment risk

Risk that overseas investments underperform due to currency fluctuations, political instability, regulatory changes or difference in market conditions

Summary

Investing is risky, but so is not investing – risk of losing purchasing power to inflation is a near certainty, while the risks of investing can be managed with time and diversification. The goal isn’t to see risk and run away from it- it’s to understand, manage it and then use it to propel your future goals.