How you can weigh up the risks you take when you invest

Julie Brownlee, Fsp Invest, 24 Feb. 2014

Tags: risk, assets, investing, investments, different investment risks, bonds, cash, property, alternative investments, shares, stocks, equities, government bonds, invest, high risk, low risk

Depending on what financial products you invest in, the risk you take on will vary. When you invest, it’s crucial that you take time to understand the risk side of all your investments. If your investment risk is very high, there’s a good chance you could lose some if not all of your cash. So how do you know what the risks are? Read on to uncover the risks associated with the main types of investments open to you…

Let’s start with the least risky investment and work our way to higher risk investments, John Stepek in Money Week explains…

When you have your money in a low risk investment, chances are you’ll get all your money back.

The lowest risk of all – cash

Keeping your money in the bank is as low-risk as you can get. So if you put R1,000 in the bank, you should get back that R1,000, plus any interest the bank pays on that amount.

Great, low-risk. But with that low-risk cash is the problem of inflation. Unless the interest rate you’re getting in the bank beats the current rate of inflation, you’ll lose money.

Government bonds like Retail Savings Bonds

These bonds are IOUs to the government. They also come with low-risk attached. For the government not to pay you back would mean the government going ‘bust’.

By lending money to the government by buying bonds, you receive interest paid twice a year. And when the term of the bond is up, you get your initial amount back.

Shares can perform well, but the risks are higher

When you buy shares or stocks, you’re buying a part of a company. This means that, over time if the share price increases, you’ll benefit when you sell your shares. Equally so, if you buy shares in a company that takes a turn for the worse, you’ll lose money when it comes to selling them.

The company pay also pay out dividends, which means you get a share of the company’s profits. But there are no guarantees you’ll receive dividends.

Property: Safe as houses?

One thing about property is the chance of your investment whittling away to zero are pretty small. But most people buy properties with debt, so that increases the risk. Think about when you buy a house. For a small deposit, the bank puts up the rest of the money.

Because of the debt involved with property, the risks are higher as a result.

If you invest in commercial property through Real Estate Investment Trusts (REITs). But this is really like buying shares rather than buying property.

Putting your cash into alternative investments

Investing in alternative investments (or collectibles), commodities such as gold and currencies are speculative assets. You buy them hoping the value will increase over time.

While it may not be a good idea to invest large amounts into alternative investments. They do play a role in diversifying your portfolio if global markets come under severe pressure.

You should have a think about the assets that you already own and which categories they fall into. This will give you an idea on the risk you’re taking on.

So there you have it, how you can weigh up the risks you take when you invest.

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