Golden Rule - Risk

Understanding risk is at the core of making good investment decisions. You cannot expect to make significant gains over the long term without exposing yourself to some level of risk. You can't ignore risk, and we will show you that you can manage it within the context of the portfolio.

There is a hierarchy of risk in investment and some investments are considerably less risky than others. The lowest level of investment risk is in Government bonds, often called 'Gilts'. There is almost no chance that the British Government is going to default on their interest payments. Since the risk is so low, the rate of return is low too.

Next step up is the company bond. In this case, the effect of market forces means there is a higher risk of insolvency, that a company could go bankrupt. Therefore, the rate of interest you receive will compensate you for this risk.

Low risk securities are suitable for the beginner and the conservative pro alike. It is definitely not advisable to invest in shares and more risky instruments until you fully understand how to value investments and the risks involved. While equities in general give a higher rate of return, they do so because you are being rewarded for the extra risk you undertake. The rate at which you will be rewarded above the risk-free rate of interest is called the risk premium.

You have now seen how different types of investments will reward you according to the risk you undertake when buying them. The challenge is to invest in such a way that your total exposure to risk is minimised and return maximised.