Understanding the Risks of Investing

Why Cash Feels So Safe

Putting money into a savings account is about as safe as it gets. You’ll wake up the next day, or two years later, and the money will still be there. Unless a meteor strikes the Earth or Australia gets taken over by crocodiles (both wildly unlikely), you can bet that cash isn’t going anywhere. There’s essentially no risk involved.

As humans, we’re wired to fear risk and avoid it wherever we can. Why take the uncertain route with an uncertain outcome, when you can take the certain route with a guaranteed one?

We also fear loss. Losing our house keys, losing our favourite sunglasses, losing hard earned money. We love the safety of cash.
And we fear complexity. Jargon like P/E ratios, dividends, bonds, index funds, and ETFs can be genuinely overwhelming, and that alone puts a lot of people off ever looking into investing at all.

The Different Types of Investing Risk

It helps to actually name these risks rather than lumping them all into one vague fear. Here’s what you’re really weighing up:

Market risk The risk that the overall market falls, dragging your investments down with it.
Inflation risk The risk that rising prices reduce the purchasing power of your money, meaning your investment returns don’t keep up with the cost of living.
Interest rate risk The risk that changes in interest rates negatively affect the value of your investments.
Credit risk The risk that a borrower fails to repay interest or principal, leading to a loss for the investor.
Liquidity risk The risk that you can’t sell an investment quickly, or without a significant price reduction, right when you need access to the funds.
Concentration risk The risk of overexposure to a single asset, sector, investment, or market. Too many eggs in one basket.
Longevity risk The risk of outliving your savings, particularly in retirement, due to living longer than expected.
Foreign investment risk The risk that overseas investments underperform due to currency fluctuations, political instability, regulatory changes, or differences in market conditions.

Summary

Investing is risky. But so is not investing. The risk of losing purchasing power to inflation is close to a certainty if your money just sits there, while the risks that come with investing can actually be managed, mainly through time and diversification.

The goal was never to see risk and run from it. It’s to understand it, manage it, and then use it to propel you toward your future goals.