Can you invest without risk?

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Moving your money out of savings may seem tempting in a low interest rate environment, but can you invest without putting your nest egg at risk?

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With no sign of higher interest rates, you may be considering turning to the stock market to achieve any real growth on your savings, but is there a way to invest without risking your nest egg?

“The short answer is no,” says Nersen Pillay, Investment Director at Royal London Asset Management (RLAM). “If you invest in the stock market there's always a chance poor performance could result in you losing your money.”

But leaving your money in a savings account isn’t completely risk-free either. While you may have a government guarantee your money won’t be lost, it could still be shrinking.

“Money sat in a savings account with a poor interest rate is losing purchasing power in the long term as it's lagging behind inflation,” says Nersen. “Your bank balance may not be falling, but the value of that money is.”

What options are there?

study by Royal London found that £1,000 put into a deposit account a decade ago would be worth less than £900 10 years later. In contrast, £1,000 put into a simple multi-asset fund with a mixture of bonds and equities would be worth over £1,500.

With the average interest rate on a savings account still very low, you don’t have to pour your money into high-risk investments in order to get a decent return. Just moving your money into relatively safe assets, like government or corporate bonds, can improve growth.

Treasury gilts, for example, are considered one of the safest investments because the UK government would have to default for you to lose your money. Gilts typically offer better returns than savings accounts, but there's still a risk that your investments could lose ground against inflation.

Move up the risk ladder slightly more and you've got the stock market. Undoubtedly, it offers tempting returns, but it comes with a risk. So, how can you keep your risk to a minimum but still beat the pitiful returns offered on cash savings?

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How do you reduce your risk?

The first thing to consider is the time frame over which you're saving. If you're going to need your money within three years, then the stock market isn’t the best place for it as market volatility means your money is unlikely to have enough time to regain any initial drops in value. If you’re wanting a long-term home for your money, then the stock market is likely to outperform cash, so your next consideration is how to reduce your risk.

“The key to minimising your risk is diversification,” says Nersen. Put your eggs into a lot of different baskets then, if one gets dropped, you don’t lose everything. The more you spread your money across asset classes and geographic regions the less risk you face of one market shock wiping out your savings.

You can diversify your own portfolio by carefully picking stocks and investments that cover a broad range of assets, such as stocks, bonds, and gilts and several regions. But, a simpler option may be to invest in a multi-asset fund, which will diversify your investments for you.

Regular portfolio check-ups will also help you with the next step to managing your risk. All investments perform differently, so while you may start out with your money evenly split over five different assets, performance will gradually skew that split. That means you need to regularly rebalance your portfolio so you don’t end up overexposed to one investment. If you invest in multi-asset funds, that rebalancing will be done by the fund manager.

Investing can be tricky, so it's best to speak to a professional financial adviser if you need help. 

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