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Video: What is risk in investing?

When we use the word "risk", we're not talking about health and safety. The risk with investing is that you could be left with less spending power than you started with.

Which, we know, can feel just as scary as ziplining or skydiving!

So to help you understand risk, we've picked out some of the questions our customers ask us most often and taken them to the experts: our fund managers, State Street Global Advisers (SSGA).

Altaf Kassam, an Investment Strategist at SSGA, visited the OneFamily Brighton office to meet with Helen Kimber, our Customer Experience and Quality Assurance Manager.

Helen put your questions to Altaf, including how worried we should be about risk and what the advantages of a riskier strategy are.

Altaf explained how the length of time you're going to be investing for should help you decide how much risk you want to take, but, he said, you should only take the amount of risk you're comfortable with.

Please note, the value of your investments can go down as well as up, so there is a chance that you could get back less than you've paid in. Neither OneFamily nor State Street Global Advisors is able to tell you what you should do with your money, if you're not sure please speak to someone who can advise you.

Let's talk about risk

Altaf Kassam is Head of Investment Strategy and Research for EMEA at State Street Global Advisors. He has almost 30 years' of investment experience.

Anything you weren't clear on?

Diversifying

Diversifying means not putting all your eggs in one basket. Rather than investing all your money in just one industry, asset type or geographical region, it’s about investing across a range so that if one asset/industry/economy goes down in value, you don’t lose everything.

Altaf uses the examples of investing in a lot of different industries and investing in companies based in different countries. That way if something causes one industry or one country’s economy to lose value, it only affects part of your investment.

At OneFamily, we diversify your investment in three ways:

  1. Asset type (we tend to invest across company shares, government and corporate bonds, and property, among others)
  2. Industry sector (we invest in many different industries, some riskier than others but this risk changes over time)
  3. Geographical location (to protect you against country-specific issues that may cause investments to fall)

Growth assets

Altaf uses the term “growth assets” in this video when talking about types of investment. Essentially, growth assets are any type of investment that is attempting to make a return. For example, we invest in company shares because we hope the company will grow and our shares will become more valuable.

Inflation

Inflation is the increase in price of the things we buy and use. This causes the value of money to go down over time, meaning that you can't buy as much with £1 as you used to be able to.

10 years ago, a single 330ml can of coke would have cost you around 75p. Today, you're unlikely to find one for less than £1. That's because £1 is roughly worth what 75p was worth in 2013.

In the future, the things you'll want to buy are likely to cost more than they do now. This is why Altaf says that ideally you want your savings or investments to grow at least as much as inflation. If that doesn't happen, you won't be able to buy as much with your savings as you could today.

Investment prices

This is simply the price of the investment at the time. For example, how much it costs to buy one share in a company – when this changes we talk about the investment price (or share price) going up or down.

When the price goes up, the value of your investment also goes up.

Portfolio

Your portfolio is all your investments and assets, including for example any shares, bonds or property you own, the cash you have in the bank and anything of value that’s in your name, such as a car.

Risk

When we talk about "risk" in investing, we mean the risk of your investment going down in value or not growing by as much as inflation.

It doesn't mean that you could end up owing money, but there is always a risk with investing that you could get back less than you've paid in.

Spending power

This simply means how much your money can buy. You could think of it as your money's 'power' when it comes to spending.

How much spending power your money has comes down to inflation. If £1 is worth less today than it was 10 years ago then it can't buy as much as it used to - its spending power has dropped.

Volatility

Volatility is how we describe changes in investment prices. Some industries are said to be more volatile than others, which means that the value of investments is likely to change more.

You might have noticed that Altaf refers to volatility as “short-term moves”, this is because investment prices are always changing and things rarely stay the same for long. If you look at a line graph of share prices, you’ll see that the value is constantly going up and down and that the line isn’t often flat.

Despite these short-term ups and downs (volatility), what we hope is that over the longer-term investments will increase - ideally by more than inflation does over the same period of time.

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Investing for beginners

At OneFamily, we believe everyone should have the same access to different ways to grow their money as everyone else.