Learn About Investing
Investing opens up the possibility that the value of your savings can go down as well as up – and you may not get out as much money as you put in.
This is one of the most significant differences between saving cash and investing in stocks & shares.
There is always risk involved with investing. Logically enough, it often boils down to paying more for something than it’s worth. Here are some common investment risks and suggestions on how to manage them.
|Risk Type||Description||Ways to deal with it|
|Specific||A company you’ve invested in gets into trouble and the share price takes a hit. In extreme cases it may go bust (think Enron) and investors could be left with nothing.||
Diversify your investments. Do detailed analysis of each asset you invest in.
|Concentration||The danger of putting too many eggs into one basket.||Diversify across different types of investment that tend not to behave in the same way.|
|Geographic||Face it, you wouldn’t want to be a Roman in 79AD with all your investments located in Pompeii.||Diversify|
|Market||Stockmarkets as a whole may be affected by broader economic, social and political factors. Examples include recessions, interest rates, political instability and so on. Emerging market nations may face particular risks in this respect.||
Manage market volatility by investing long-term. Benefit from ‘cost price averaging’ by investing monthly. Buy when markets are depressed and sell when they’re riding high.
|Currency||If you’re buying an asset abroad you will need to convert your pounds into foreign currency and back again when you’re done. Currency fluctuations can affect the worth of your investment relative to your living costs, for better or worse.||
Diversify with UK assets and others denominated in different currencies.
|Liquidity||The risk you can’t access your money as fast as you want – because your assets can’t be disposed of quickly, at least not without incurring losses. Cash is a highly liquid asset, while property is at the other end of the spectrum because it can take months to sell a house.||Diversify and hold sufficient liquid investments to meet your likely cash needs.|
The risks associated with ineffective management and underperformance.
Select a passive fund.
|The risk of brokers, custodians or other parties becoming insolvent while they’re handling your investments. Your money may well be legally protected against their creditors, but it could still take a while to get it back.||Use FCA-regulated financial service providers with a solid track record.
Ask your provider how your assets are protected.