Everyone knows investing in the stock market can be risky, but is it worth it for the potential rewards?

Although investing involves risk, not all risks are equal.

The key to successful long-term investing is understanding the risks and rewards involved. You can then determine the appropriate amount of risk for you and your financial goals.

If you’re new to investing, this may sound easier said than done. But it may be simpler than you think.

Here, we explain investment risk and what it could mean for you.

What is investment risk?

The main risk of investing is the possibility of losing money – you might not get back what you put in. There’s also the risk that you won’t achieve your expected returns over a particular period.

The outcome of any investment is uncertain for multiple reasons, not least the unpredictability of the market. The performance of a company’s shares you own could take a turn for the worse, or economic issues could have a negative effect on the stock market more broadly.

It’s natural to want certainty. So why take the risk with your money?

Well, it could give your money the potential to increase in value above and beyond inflation.

Risk and return go hand-in-hand

Risk and return are closely linked. You can’t have one without the other. Historically, the lower the risk, the lower the potential return; the higher the risk, the higher the potential return.

If you’d rather protect the money you already have, you may have to forego the possibility of meaningful growth.

Finding the balance between the lowest possible risk and highest possible return is dependent on many factors, such as your risk appetite and how long you invest.

Can investment risk be managed?

It’s impossible to eliminate investment risk, but it can be managed.

One way in which investors manage risk is through diversification. Diversification means putting your money in a range of investments. That way, if one investment performs badly, it could be balanced out by others – spreading your risk. 

Mutual Funds may be a cost-effective way to do this. Mutual funds are a type of pooled investment vehicle that gives you access to multiple assets at once.

Another option is a multi-asset mutual fund, where the mutual fund manager selects a range of asset types to cater for specific risk appetites.

Can you tell how risky an investment will be?

The amount of risk in an investment will depend on what the investment includes.

Lower-risk investments typically contain a mix of cash and fixed-income assets. Higher risk investments may have more shares or equities.

When you invest in a mutual fund, for example, you’re buying a share in the fund itself and the assets it owns, such as stocks, bonds, or money market instruments. They are professionally managed and operated by money managers, who maintain the portfolio as per the fund’s investment objectives as stated in the prospectus.

Mutual funds, money market funds, and exchange-traded funds are sold by prospectus.

Please consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus, which contains this and other information. 

Read it carefully before you invest. 

Each mutual fund has an assigned risk profile, which gives you an idea of the level of volatility you should expect. Mutual funds with the lowest risk profile are the least volatile, and those with the highest risk profile are the most volatile.

So, if you’re a cautious investor, you may want to choose a lower risk fund in exchange for potentially lower but more stable returns.

If you’re comfortable with the risk of losing money, a mutual fund with a higher risk profile may be more suitable. The potential returns could be higher, but there may be higher levels of volatility.

How does time affect risk?

Different investments cater to different time horizons – the time you have to reach your goals.

The longer your investment horizon, the greater the risk you can afford to take, as you have more time to recover from market downturns.

Your risk appetite will also depend on your goals. If you’re saving for a fixed amount, you may want to be more cautious. But if your goal is more general, you could potentially take on more risk.

Investing should be seen as a medium-to-long-term commitment, where you should be prepared to invest for at least 5 years. 

Because of this, having 3 to 6 months’ worth of expenses saved in an emergency fund is essential before you start – to avoid having to sell your investments too early.

What does all this mean for you?

Understanding the potential risks and rewards of investing is vital to making informed decisions. You need to feel comfortable with any risks that you decide to take.

But if you’re not sure what level of risk is right for you, work with one of our Securities Brokerage Team experts to explore investment solutions that best suit your needs.