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All savings and investments involve some degree of risk, as even seemingly safe deposit based savings run the risk of their spending power being eroded by inflation. However, making an informed decision to accept some risk also creates the opportunity for greater investment returns.

This fundamental principle of investing is known as the risk/reward trade-off.  There are a number of different factors for investors to consider

Inflation

As we said before, while deposit accounts are simple, low risk products designed to preserve your capital, they may not provide a sufficient return to protect your capital from the often overlooked risk of inflation - ie that inflation will rise faster than your returns leaving you with less real purchasing power. This is known as inflation risk and is generally associated with leaving too much money in this low return environment.

Market movement

Movements in the financial markets may lead to large gains or losses in the value of your investments. This is usually what most people think about when considering investment risk. However, some financial markets are more volatile than others, meaning they can rise and fall much more rapidly and dramatically. Historically, those investments that have fluctuated in value have produced better returns over the longer-term.

Accessibility

Unlike savings accounts which are specifically designed to be easily accessible, most investments are intended as medium to long-term commitments. Therefore, if access is required during a downturn in the markets the capital value is likely to be reduced. This is why it is important to have an adequate alternative source of funds in deposit accounts.

Investment Goals

As we’ve seen, many people invest with a particular purpose in mind simply to get a better return than deposits can offer, for example for a car or holiday home, to maximise retirement income or leave money to their families. It is essential, therefore, that you review your investment strategy on a regular basis with your financial adviser to ensure that you’re on target. 

If you’re not on target, your options will include investing more capital, altering your investment strategy, potentially by taking greater risk or accepting that your objective may not be fully achieved.

 

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