Stienemarié Bonsma-Potgieter, CFP® – Financial Planner

Investing can be overwhelming, with countless factors to consider. Among these, investment risk seems to be a big concern to most investors. When most investors think of investment risk, they often think about volatility, i.e. the up and down movements of the market that affect the investment value. While market volatility is one aspect of risk, there is more to investment risk than the movement of your investment.

When investors think of risk, they often worry about the possibility of losing the money they started with. This fear drives many investors to choose a very safe investment strategy with the main goal of not losing any capital. While playing it safe can help avoid short-term losses, it can increase the risk of a lesser obvious yet more significant long-term danger: inflation risk.

This refers to the risk of your money becoming worth less over time because of increasing prices. While it might not be as visible as market volatility, inflation risk can seriously impact your long-term financial goals. Inflation erodes the real value of your investments and can result in a reduced standard of living in the future.

Consider a scenario where an investor decides on an overly conservative approach by putting most of their money into cash and bonds. While this strategy may seem safe in the short term, it exposes them to the risk of their returns failing to keep pace with inflation. Over time, the real value of their investments declines and their ability to buy things with that money decreases.

Investors need to find a balance between risk and return to protect themselves from the often-underestimated inflation risk and achieve sustainable long-term growth. Investments into shares have historically given better returns than bonds and cash investments over the long run. While shares can be more unpredictable and come with a higher chance of short-term losses, they have historically outperformed inflation and delivered substantial real returns.

Adding shares to your investment portfolio can be a good way to protect against the risk of your money losing value and rather work towards growing your wealth. The key is to figure out the right mix that matches how much risk you’re comfortable with and your financial goals. This balance may change based on your age, how long you plan to invest, and how much risk you’re willing to take.

While it is important to include enough shares in your portfolio, diversification is also key. Diversification means not putting all your money in one place but spreading it across different types of investments, industries, companies and areas around the world. This helps lower the risk of losing your money permanently.

In summary, managing investment risk isn’t about completely avoiding it, but rather understanding different types of risk and creating a strategy that finds the right balance between risk and reward to reach your financial goals. When you acknowledge how the way you allocate your investments relates to your perception of risk and aim for a diversified portfolio that will provide growth, you can make better and more informed decisions in the complicated world of investments.