Investment risk generally refers to two concepts:
- Variability of investment returns;
- Possible loss of capital.
Variability of investment returns refers to the fact that returns (income and growth) change over time. This means the value of investments both rise and fall. The same types of investments (say shares) may also grow (or decline) at different rates over different periods of time.
Possible loss of capital refers to the fact that your investments may suffer a loss that cannot be recovered.
The impact of these investment risks is that investment values rise and fall over time. These changes in investment value occur for a variety of reasons including:
• changes in the economic and political climate;
• changes in government policies and laws;
• movement in currency markets;
• changes in interest rates; and
• investment decisions made by investment managers and fund managers
Typically investments with a higher proportion of growth assets, such as shares and property, have historically provided higher long-term returns than those which have a higher exposure to defensive assets, such as fixed interest and cash.
However, investments with a higher proportion of growth assets are also generally subject to a higher risk of a short-term loss in value than investments with a higher exposure to defensive assets.
Diversification of investments can help reduce investment risk.