Faith Morrow
Risk is fundamental to investing, and investors must consider the likelihood and magnitude of bad outcomes. Low-risk investing means there is less at stake and less to gain, but it also means protecting against any loss and making sure that none of the potential losses will be devastating. High-risk investments, on the other hand, have a large percentage chance of loss of capital or under-performance, or a relatively high chance of a devastating loss. Conservative investments are lower risk and offer moderate profits, while very aggressive investments provide a chance for outsized gains but also expose you to the possibility of big losses.
| Characteristics | Values |
|---|---|
| Amount Invested | Lower risk investments have a lower amount invested |
| Significance to Portfolio | Lower risk investments are less significant to the portfolio |
| Potential Return | Lower risk investments have a lower potential return |
| Potential Benefit | Lower risk investments have a lower potential benefit |
| Chance of Loss | Lower risk investments have a lower chance of loss |
| Magnitude of Loss | Lower risk investments have a lower magnitude of loss |
| Chance of Devastating Loss | Lower risk investments have a lower chance of a devastating loss |
| Investment Category | Conservative investments are lower risk |
What You'll Learn
Conservative investments
Risk is fundamental to investing. Conservative investments are low-risk and offer moderate profits. They are investments where there is less at stake, either in terms of the amount invested or the significance of the investment to the portfolio. There is also less to gain, either in terms of the potential return or the potential benefit in the long term.
A high-risk investment is one for which there is either a large percentage chance of loss of capital or under-performance, or a relatively high chance of a devastating loss. If you were told there's a 50/50 chance that your investment will earn your expected return, you may find that quite risky. If you were told that there is a 95% chance that the investment will not earn your expected return, almost everybody would agree that that is risky.
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Low-risk investing
Risk is fundamental to investing. Low-risk investing means there is less at stake, either in terms of the amount invested or the significance of the investment to the portfolio. There is also less to gain, either in terms of the potential return or the potential benefit in the long term.
By understanding what risk is and where it comes from, investors can work to build portfolios that have a lower probability of loss and a lower maximum potential loss. A high-risk investment is one for which there is either a large percentage chance of loss of capital or under-performance, or a relatively high chance of a devastating loss.
If you were told there's a 50/50 chance that your investment will earn your expected return, you may find that quite risky. If you were told that there is a 95% chance that the investment will not earn your expected return, almost everybody would agree that that is risky.
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High-risk investments
Risk is fundamental to investing. Investors must consider the likelihood and magnitude of bad outcomes. High-risk investments are those with a large percentage chance of loss of capital or underperformance, or a relatively high chance of a devastating loss. For example, if you were told there's a 50/50 chance that your investment will earn your expected return, you may find that quite risky. If you were told that there is a 95% chance that the investment will not earn your expected return, almost everybody will agree that that is risky.
Conservative investments offer lower risk and moderate profits, while very aggressive investments provide a chance for outsized gains but also expose you to the possibility of big losses.
By understanding what risk is and where it can come from, investors can work to build portfolios that not only have a lower probability of loss but a lower maximum potential loss as well. Low-risk investing means protecting against the chance of any loss, but it also means making sure that none of the potential losses will be devastating.
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Chance of loss
The chance of loss is a key factor in determining the risk level of an investment. Low-risk investments are those that have a lower probability of loss and a lower maximum potential loss. This means that even if a loss occurs, it will not be devastating to the investor. Low-risk investments are also less likely to underperform relative to expectations.
On the other hand, high-risk investments carry a large percentage chance of loss of capital or underperformance. There is also a relatively high chance of a devastating loss. This means that even if the investment performs as expected, there is still a risk of losing a significant amount of capital.
Conservative investments are generally considered low-risk, offering moderate profits with a lower chance of big losses. In contrast, very aggressive investments provide the chance for large gains but also expose investors to the possibility of substantial losses.
It's important to note that risk is subjective and can vary depending on individual investors' risk tolerance and expectations. What one investor considers a high-risk investment may be viewed differently by another investor. Therefore, it's crucial for investors to understand their own risk tolerance and build portfolios that align with their comfort level and financial goals.
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Potential returns
Risk is fundamental to investing, and investors must consider the likelihood and magnitude of bad outcomes. Low-risk investments have less at stake, either in terms of the amount invested or the significance of the investment to the portfolio. There is also less to gain in terms of potential returns. Low-risk investing means protecting against the chance of any loss and ensuring that none of the potential losses will be devastating.
Conservative investments offer lower risk and moderate profits, while very aggressive investments provide a chance for outsized gains but also expose you to the possibility of big losses.
High-risk investments have either a large percentage chance of loss of capital or under-performance, or a relatively high chance of a devastating loss. For example, if you were told there's a 50/50 chance that your investment will earn your expected return, you may find that quite risky. If you were told that there is a 95% chance that the investment will not earn your expected return, almost everybody would agree that that is risky.
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Frequently asked questions
A low-risk investment is one where there is less at stake in terms of the amount invested or the significance of the investment to the portfolio. There is also less to gain in terms of potential return or benefit. Low-risk investments protect against the chance of any loss and ensure that none of the potential losses will be devastating.
A high-risk investment is one where there is a large percentage chance of loss of capital or underperformance, or a relatively high chance of a devastating loss.
Conservative investments offer lower risk and moderate profits, while aggressive investments provide a chance for outsized gains but also expose you to the possibility of big losses.
If you were told there’s a 50/50 chance that your investment will earn your expected return, you may find that quite risky. If you were told that there is a 95% chance that the investment will not earn your expected return, almost everybody will agree that that is risky.
The risk pyramid is a framework that categorises investments from conservative to very aggressive. These categories correspond with the potential returns you could earn on an investment.
