What’s Risk and Reward?
Investment risk can be defined as the “potential for variability of return”. But what does that really mean? Put simply, investments can fall as well as rise so the value of your pension account can increase or decrease depending on how well or not those investments perform. This is called volatility. Investments carry different types of risk, for example, inflation, currency, market risk, etc.
There is usually a link between the level of risk attached to an investment and the potential return (profit) on that investment.
Some investments, such as cash and bonds, are considered to be conservative investments which means they carry less risk but will not grow as much. By comparison, equities or shares are riskier investments – so there is more volatility in these investments, but the likelihood of a better return.
The word risk is usually seen as negative, but where there is risk there is also the potential for reward. In general, the more risks you are prepared to take with investments, the better the chance for higher rewards. The more cautious you are, the lower your returns may be. However, it is important to remember that cash – which is sometimes perceived to be low risk – carries a number of risks including inflation risk, where it does not grow quickly enough to keep up with inflation (and hence buying power is eroded).
You should consider taking financial advice to help you decide what investments are suitable for you.