Risk can be defined as the potential for variability of return. But what does that really mean? Put simply, there is a clear link between the level of risk you are prepared to take and the potential return (profit) on your investments. As a general rule:
The word risk is usually thought of as a negative thing, but when there is risk, there is the potential for reward. In general, the more risk you are prepared to take with your money, the better the chance it will bring you a higher reward. The more cautious you are with your money, usually the lower your returns are likely to be. In other words, you can expect to be rewarded for taking risk.
Of course, you should bear in mind that the value of your investments, particularly those perceived as risky, can fall as well as rise. However, it is important to remember that cash, which is sometimes perceived to be low risk, carries a number of risks including:
- Inflation risk - whereby it does not grow quickly enough to keep up with inflation (and hence buying power is eroded).
- Annuity risk - cash funds do not move in line with annuity rates; this is important because most members will buy an annuity (pension) when they retire.