What is investment ‘risk’?

Risk, like returns, is an everyday part of investing. In this article, we cover what it is, what it can mean for investors – and how to factor it into your investment choices.

2 minute read

Risk can seem like a scary word. With investing, it refers to the likelihood of losing money – which no one wants. The simple reality is, every form of investing comes with a degree of risk. Generally, the higher the risk the higher the potential returns – and the lower the risk, the lower the potential returns.

Lower-risk investment options include things like bonds and term deposits. The risk of losing money is lower, but then the returns can be too. At the other end of the risk spectrum are options such as shares and more exotic things like art, commodities and crypto currencies, which can offer higher returns, but can come with higher risks (and higher losses) too.

Generally, higher-risk investments such as shares can offer good returns over longer periods of time, where there’s enough time to recover from the short-term ups and downs (volatility) associated with these options. You can read more about investment volatility if you like.

If you’re new to investing, and trying to work out which investment product is right for you, risk is one of the key things to think about, along with having a clear idea of what you need to achieve from your investment (your investment goal) – and the amount of time you can invest your money for. 

Some people don’t invest at all, because they think it’s too risky, choosing instead to save in cash.

While this can seem like the safest option, the truth is that there’s a real risk the rate of inflation can be higher than the rate of interest those savings are earning. So, over a period of time, the value of those savings can be quietly eroded.

At the end of the day, if you want to grow the value of your money, you’ll need to accept some degree of risk. When you’re deciding how much risk you’re prepared to take, bear in mind there’s a general rule that, the longer you have to invest, the more risk you can take. Investors planning on retiring, or buying a home in a few years time, tend to opt for lower-risk investment products than those with much longer investment ‘windows’.

Five things to know about risk:

1. You have to be willing to take on more risk if you are seeking higher potential returns.
2. The more risk you take, the higher the chances of making a loss, especially in the short term.
3. Set an investment goal – work out how long it may take to achieve this goal because this will impact how much risk you may choose to take
4. Money you need for day to day spending (or short-term needs such as rent), shouldn’t be invested in investment products designed to deliver returns over the long term.
5. The further away your goal, the more risk you can usually afford to take as you have a longer time to recover from any losses.

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This article is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser. While BNZ has made every effort to ensure that the information provided is accurate, neither BNZ nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this article.