Video: What is risk in investing?

Let's talk about risk

Helen:

Hi, I'm Helen, and I work for the Customer Experience Department at OneFamily, and I'm here joined by Altaf Kassam from State Street Global Advisors. And we are talking today about risk.

So what does risk mean in terms of investing?

Altaf:

Well, one thing I have to start with is that all investments involve risk. Some are riskier than others. You can smooth risk out, but you can't take it away.

Now, what investors in financial markets are trying to do is predict the outcomes of companies and economies. And they try and do that by kind of looking into the future.

But what happens is that when something unpredictable happens, like a war or a pandemic, then they have to change those forecasts quite quickly. And that makes investment prices move up and down, and that creates volatility, which is a form of risk.

And another form of risk is inflation. Inflation is the risk that your spending power gets eroded because prices keep going up.

So those are two of the important risks that we think about in investments. There are other risks as well, but that's kind of what we focus on. And it's important to realize that, you know, once again, you can't get rid of risk completely. So there's always the risk that in an investment, you get back less at the end than you put in at the beginning.

Helen:

Okay, so how can someone reduce their risk in investing?

Altaf:

So, one way that you can reduce the risk, like I said, is by diversifying. So, you could buy a broad range of shares across a lot of different countries. You could buy a range of bonds across a lot of different industries. You could mix your shares and your bonds together in one fund.

And that's essentially what you're doing when you're investing in financial markets in a fund, as what we do at State Street Global Advisors. So, we try and invest broadly across the broad market, try and diversify that risk away.

Again, we can't get rid of risk completely. There's always the risk that you'll get less out of your investment than you put in at the beginning. And, you know, investments do have downs as well as ups, but by diversifying, by trying to smoothen out that risk, you can help yourself achieve a better return in the long term.

Helen:

Okay, so how worried should we be about risk?

Altaf:

Well, it's hard not to worry about risk, especially when someone tells you not to worry about risks!

What's important though is that if you look out over longer and longer time horizons, if you kind of zoom out from your investment journey, you find that those speed bumps that seem scary or bumpy at the time, as you look out over longer and longer time horizons, that short term risk is less and less important.

So, it means that, for example, if you've got a longer and longer time horizon to invest in, then those short term moves, that volatility, is something that you should worry less about.

Again, it's hard not to worry, but it's important to keep the kind of long term perspective. So if you've got longer to invest, for example, you've got longer term time to retirement, or you're a parent investing in a junior ISA for your kids, you've got a long time to invest that, then the short term moves become less important.

If you're older like me, closer to retirement, you should be a bit more worried about risk, but you should still be taking some risk in your portfolio. But what's important is that you should research your options thoroughly, you should take advice from reliable sources, and you should consider how much risk you're comfortable taking.

Helen:

And why choose a riskier product over a safer one?

Altaf:

There, again, it comes down to your time horizon.

So, when you have the ability to take on more risk, if you've invested in growth assets, which can grow more over time, then the short term risk becomes less important, and so you can afford to take on that much extra risk.

Again, it comes down to the amount of risk you're comfortable with, and how you feel about investing over the longer versus the shorter term.

Helen:

That makes sense. So if you want to invest over a longer period of time, does that mean that risk becomes less?

Altaf:

Risk doesn't go away, like I said, but what it means is that as you have a longer time to invest, that the impact of those short term moves, that volatility becomes less compared to the growth that you'll hopefully get in, for example, the shares that you invest in.

Helen:

That makes sense. Thank you so much for coming in, Altaf, and speaking about the kind of scary topic that is risk.

Altaf:

Thank you very much.