Risk. Could you define it?
In layman’s terms, risk is a measurement of how likely it is that a bad outcome will occur. On the building site, the risk of serious head injury increases when you don’t wear a helmet.
In the markets, however, risk seems somewhat more acceptable. Companies, traders, and private investors, take risks all the time, because there is simply no reward without it.
For you, however, risks may seem more personal.
A few years ago, advisers were cautioned by the Financial Conduct Authority to make sure their clients understood the risk of losing money on their investments, and how this would affect their financial plans. A discussion subsequently emerged about capacity for loss, and the extent to which people like you might be too dependent on dangerous investments.
Events have since broadened the discussion once more. During the pandemic, businesses of all shapes and sizes faced what felt like a new risk, and the personal suddenly became dramatically economic. And since then, the spectre of inflation has shown that we’re in a new era of monetary risk altogether: because, when our investments don’t keep pace with prices, nobody really wins. Having warned us about inflation just a few years ago, today, some advisers are feeling very smug indeed.
But just like inflation, risk can be very personal, and very specific. So ask yourself: if you’re a big spender on food, and food prices are stubbornly high, will you be more exposed? Undoubtedly. And if you happen to be poorly diversified when the ship sinks, will the pain be greater? Inevitably. And then there's climate risk, which is in a league of its own.
Finally, there’s the big question. If the crucial sale of Credit Suisse is anything to go by, we’re not now wrong to look for the spark that’s going to light the next fire in the global economy. Nobody really knows, but in Risk Week on Morningstar.co.uk, we are at least able to show you some of the potential candidates. So stay tuned, and get comfortable, as we take you through our understanding of risk.
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