Low, medium and high risk investments – the difference

Investing is always a gamble – as no one can predict the future. But if you want to get into the investment game, you need to do your homework when it comes to risk.

What is risk exactly? Well, in very basic terms, risk is the probability of failure. Will something fail? Not likely – low risk. Possibly – medium risk. Probably – high risk. But…and this is an important ‘but’ – if say the high risk investment does succeed – the returns will most likely be much better than those of the low risk investment.

Low risk

Well, firstly – the safer or lower risk investments can usually be counted on to give you a set return, or at least keep your initial investment – called capital – safe. You usually won’t earn a great deal of interest (and sometimes none), but your chances of losing your initial money are very low. Examples of low risk investments will be things such as savings accounts, government bonds and money market accounts.

High risk

These kinds of investments can cost you a great deal if they fail, as you usually take a big chance on them. A good example will be pharmaceutical stocks – many new medicines fail, and therefore there is a great risk of your ‘pick’ going down. On the other hand, should it succeed, you stand to make quite a big amount of money. Your risk taking might just pay off in big bucks!

Medium risk

As you probably figured out for yourself, medium risk investments are somewhere in between low and high risk. They’re not seen as quite as ‘safe’ as low risk investments, but they’re also not as ‘risky’ as high risk investments.

So what is this risk thing?

Risk has two sides to it when it comes to investments. Firstly – how likely is this investment to fail? And secondly, if it fails, how devastating will the loss be? Consider these things – and keep the old saying in mind: “Never invest money you can’t afford to lose”. This is a very good rule, especially when you are starting out. It does get a bit trickier when you start reaching retirement though, as you might face the prospect where you need to invest your pension (money you CAN’T afford to lose) into an investment vehicle. So yes, there’s always an exception to the rule.

How do you choose your level of risk when investing?

Well, your age has a lot to do with it. If you are in your twenties, you can afford to ‘play around’ a bit and take a lot of risks. Yes, you shouldn’t be stupid, but you have time on your side, so you can play the long game. But when you are nearing retirement, the key is to choose something much safer that will ‘preserve’ your money. Yes, growth is important, but NOT LOSING your cash is much more important.

We’ve all heard that the longer you are in the game, the more potential you have of your money growing substantially, so it is logical that you start as soon as you possibly can. Investing should be something you consider the day you start working. Putting away 10% of your paycheck (like your granny always told you) is actually a fantastic idea.

As always – doing your homework is key. Look at the investment vehicle. Find out about the financials of the institution, the competition, the prospects of success. Speak to a broker, your bank manager, and Google the company. Make sure your decisions are informed. Knowledge, as always, is power!

Categorised in: Investments and Savings

This post was written by thys