About investment risk
The value of your investments can go up and down. Over the right timescale the rewards from investing can be very high – but you can also be unlucky to hit one of the rarer periods of more sustained weakness. There’s really no guarantee either way – and sometimes there’s no way to predict the big events which affect the value of funds. Wars, natural disasters, the price of oil... many major world events can shake things up.
Balancing risk...
Events in late 2008 have demonstrated just how much – and how quickly – stock markets can fall. This isn’t a one-off: from 1918 to 1977 it was common to see one year in three with stock market falls, with drops of 20-30% commonplace. The average bear market (downturn) in the US since 1875 had a peak-to-trough fall of 32% and lasted 18 months.
With most falls, a little patience soon sees the markets back to where they were, and then increasing again. There have been, however, much more difficult periods, what we call the “accidents of history”, such as the great crash of 1929. Allowing for inflation, the peak in the US stock market of 1929 wasn’t reached again until 1954 (25 years) and a similar 1966 peak wasn’t exceeded in real terms until 1995.
If you have other savings and income the troughs shouldn’t affect you too much, but if you’re planning to retire on your investments and this comes at a time when the markets are down you may have to re-think your plans. The risk of this can be mitigated with a sensible spread of investments, and levels of risk based on what you are comfortable with.
...with reward
The short-term falls in market value are usually just that: short term. Over the longer term, investments typically provide better returns than bonds or deposits, and protects against inflation as well. A ten year investment has a 93% probability of outperforming deposits and an 82% probability of outperforming bonds – and that’s with those regular drops in value. Most of the time the stock market is in an up-trend.
What next?
Now you’ve read a little more about investment risk, you need to understand how this relates to funds. You can also contact us to get more information about how we can help advise you about investment risk – or get hold of a hard-copy of our TopFunds Guide with more in-depth information.