Investment Risks: Every Investment Has Risk

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There was a time when keeping your money in a Savings and Loan (UK Building Society) or bank savings account was relatively safe - even if it did not secure an exciting return.

Times changed, especially when investors chased higher returns from foreign banking institutions. If a UK investor deposited their money in an Icelandic Bank on the basis that a higher interest rate was forthcoming, then they sacrificed security, even though they may not have known it. The safety net of depositing their money in a UK bank, for the prospect of earning a greater amount of money in an offshore location, was forfeit.

You must determine the possible downsides of any investment decision in order to determine whether you are comfortable undertaking the action.

The failure of collateralized loans, particularly house mortgage loans to higher risk individuals, proved to be the tipping point for security in money-based institutions. It was then that the general public realized that the safety of their money was an illusion, swept away by the tide of banking greed.

Some Governments bailed out their banks to try to stabilize the industry and stave off economic ruin. At the same time they needed to reassure investors that their money was still safe in domestic banks. With the UK Government Bank Deposit Guarantee Scheme, money deposited with a UK Bank, Building Society or Credit Union, a net balance up to £50,000 has been secured.

So you see from this that everyone is an investor and should take the time to understand investments so that they are not burned by the decisions they make with their money.

Be aware that it is not a panacea that higher risk automatically guarantees a higher return.

Far from it!

Even in a "bull" (rising) market you may be unlucky enough to pick the wrong shares and lose money, relatively speaking. Opting for the riskier investment would not have produced a higher return - even though other investors, who chose alternative shares, might have succeeded.

These are just aspects of the risks in investment.

There are always risks, even if you stash your money in the mattress, when inflation, and the possible collapse of the currency, could devalue your savings. This is where risk assessment, investment risk analysis and risk management are utilized.

Now suppose you decide your investment strategy should be to extract your money from your account and invest it in the stock market, in order to gain a higher return.

You can check on the internet to see how much better this would have been over the entire period that any stock exchange has been in existence. At no time has the return (basing a general investment on the stock exchange index) been lower than the return from a deposit account.

Of course, if you had been unlucky enough to choose the wrong stocks or shares, or had speculated unwisely, then this situation could have been reversed.

Even the dramatic falls in all of the 'stock market crashes' did not put a stop to the overall rising trend seen throughout securities investment history.

Historically, during these crashes, the security prices dropped to levels seen in the not too distant past. It was the speculators that got burned: the investors just viewed it as a short-term blip in their long-term view of their investment strategy.

At no time though did the average rate of return on securites (stocks / shares) fall anywhere near as low as the return that would have accrued from a deposit account. And that includes term savings investments.

Do not take these statements to mean that if you are risk averse that you should still invest in the stock market.

There is another side to the coin: the question of risk.

The higher the return the higher the risk.

The only way to find them is by consistent detailed analysis of the risk involved against the return on investment, whether that be growth or income.