In a world of low to zero interest deposit accounts and few capital secure investment options, from the outside it appears not to be a good time for the low risk investor. However, this is not necessarily true. Many people, when they think about investing, automatically envision large scale and high-risk products that are completely out of sync with their needs in terms of capital preservation or growth. This does not need to be the case!
Investments are generally risk rated on a scale of 1 to 7 with 1 representing the lowest possible risk and 7 being the highest risk. The higher up the scale you go, generally speaking, the more exposed to stocks and shares you will be. Lower risk investment funds tend to be largely made up of cash and bonds, for example.
What many investment funds do have in common is something called diversification. Diversification is one way a fund reduces investment risk. This can be by investing in a wide range of asset classes (for example, shares, property, cash, bonds, commodities etc) or in a range of different securities within an asset class or even by diversifying across different geographical regions (example US securities and European securities). The ideal scenario is where there is little correlation between the assets ie. if one falls in value, the other rises and so on. For the low risk investor, this is very important as if you are over exposed to any one type of asset you may see a fall in your investment if this asset performs poorly.
The other main way of reducing investment risk is to look at the longer term. Time is a proven method of increasing an investor’s chances of making a return as historically the main asset classes, such as stocks and property, have tended to generate strong returns over longer periods. This may mean you will see falls in your investment in the short term, but if you are willing to stay put and not panic, more often than not you will not only make your money back but generate good growth on top of this.
A combination of both time and diversification is therefore an ideal way of reducing risk for an investor. The more you have of either the better it is.
As with any investment, it is a good idea to seek independent financial advice before making any decision.
26th October 2017