What do you think of when you hear the word “risk” in investing? Gambling? Losing money?
For many new investors, the idea of risk can be scary. But you don’t need to be afraid of it. In fact, understanding and managing risk is how you grow your wealth.
Simply put, risk refers to uncertainty. Nobody can promise you how much you will make on an investment, or predict when you should buy or sell. The best they can do is make an educated guess. Risk is the possibility that your investment may not perform how you expect. It doesn’t always mean losing money. It could also mean earning less than you hoped or facing ups and downs along the way.
Every investment has some risk. That’s why it’s important to understand how much risk you’re willing to take and what kind of risks each investment has.
Market Risk
There is market risk, which is the risk that the overall market will go up and down. If the economy slows down, or there’s a crisis, stock prices may fall. We saw this in Jamaica because of COVID. But guess what? Markets go through natural cycles. Sometimes they’re up. Sometimes they’re down. But in the long run, history has shown the market eventually goes back up, even if it's slow at times.
Credit Risk
Now when it comes to bonds, these are usually considered low risk. But there’s still a risk that the issuer will not be able to repay the bond. This is called credit risk. It happened with the Digicel bond a few years ago. Remember low risk does not mean no risk.
Currency Risk
Then there’s also currency risk. If you invest in foreign markets or companies, exchange rate changes can impact your returns. We know that all too well here in Jamaica. Trinidad’s now feeling some of that too.
So the bottom line is, risk and reward are a balancing act. High risk investments tend to have higher returns, but you can also lose big. Low risk investments can be more stable, but will have lower returns. It’s all about understanding your risk tolerance and why you’re investing.
You can’t avoid risk completely, but you can manage it by diversifying your portfolio, thinking long term and staying informed and educated.
Take our Risk Profile Quiz to learn more about your risk tolerance!