While the following content is intended to be educational, it does contain promotional material for Kaldi.

What they don't tell you when you first start investing is that there's a moment, somewhere between reading the words "your capital is at risk" for the 23rd time and watching a number on your screen go slightly red, where you think, “what have I done? I have made a horrible mistake. I have personally destroyed my money”.

You haven't (probably). But that doesn’t make the feeling any less real, and nobody prepares you for it. So, what is investment risk, actually?

The Tc and Cs

Investment risk is one of those phrases that gets used so often it stops meaning anything. It sits in small print at the bottom of every financial product you've ever glanced at. It follows you around like a mild but persistent threat. And because nobody ever explains what it really means in practice (you know, what it feels like, what it looks like, and crucially, what you're supposed to do with that information) most people do one of two things: they ignore it entirely, or it scares them off investing altogether. Neither of those is great.

Tell me more about investment risk

At its most basic level, investment risk is just the possibility that the thing you invest in goes down in value. That's it. It's not a scam. It's not a warning that disaster is imminent. It's the acknowledgement that money invested in markets moves, be it up, down, sideways, and that nobody, not even the people who do this for a living, can tell you exactly which direction it'll go next.

Not your typical savings account

The stock market is not a savings account. A savings account gives you a fixed, guaranteed return, and in exchange for that guarantee, it gives you a fairly modest one. For instance, the average instant access savings rate in the UK is around 2% right now. It’s fine, better than nothing, but not exactly thrilling.

The market, on the other hand, has historically trended somewhere between 6% and 8% annually over long periods, though it does so by sometimes being quite dramatic in the short term. That's the trade-off. You're not being punished. You're just operating in a different kind of system, with a different set of rules.

Mr manager

The good news, and there is good news,  is that most of this is manageable.

Index funds, for example, spread your money across hundreds or thousands of companies at once. If one company has a terrible quarter, you barely feel it  because you're not in that one company – you're in the whole market. 

The index fund is essentially the financial equivalent of not putting all your eggs in one basket, except it also happens to be low-cost and largely passive. It's boring in the best possible way.

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What about risk tolerance?

Risk tolerance is another thing worth understanding, because it's about you as much as it's about money. The question isn't  really "how much risk is in this fund?" as much as it's "how much risk can I sit with?" 

Those are different questions. Someone who needs their money back in eighteen months has a different tolerance than someone who's investing for the next thirty years and barely plans to look at the number until then. Someone who will lie awake worrying every time markets wobble needs a more conservative fund than someone who doesn’t care and would like to be informed when it's all over. Neither approach is wrong. They're just different.

Managing risk with Kaldi

Kaldi lets you pick a fund based on a risk rating, which is helpful for exactly this reason. The risk levels are a starting point for a conversation with yourself about what you want your money to do, and how much uncertainty you can live with while it does it. 

A money market fund sits at risk level one. That’s to say it’s very stable and very low volatility – basically a sensible place for money you might need soon. A fund like the Vanguard LifeStrategy 100% Equity, at the higher end of the scale, is investing in global markets and will move around more.  But over the long term, it has historically delivered more too. The risk rating is asking you how much uncertainty can you live with while your money does its thing.

Looking out over the horizon

There's also the time horizon thing, which is probably the most underrated piece of information in all of personal finance. The longer you leave money invested, the more time it has to recover from dips and benefit from compound growth. 

Short-term volatility looks terrifying if you're zoomed into the last three months. Zoom out to ten or 20 years and most of those terrifying moments become barely visible bumps on a line that's going upwards. This is not a guarantee of future performance (unfortunately, nothing is), but it is context. And context makes a significant difference to how you feel about a red number on a random Thursday.

None of this means risk isn't real. It is. You can invest money and get back less than you put in. That can happen, and it's important to know that going in. The practical implication of that is: don't invest money you can't afford to lose, or money you'll need in the next year or two. 

Keep an emergency fund in cash. Be honest with yourself about your timeline. And then, and this is the bit people find hard,  try not to stare at it.

Checking your investment every single day is one of the fastest routes to a stress you didn't need to sign up for. Markets move constantly, going up and down. If you've chosen a sensible fund, set a reasonable amount, and you're not planning to touch it for a decade, the day-to-day noise is just noise. 

Set up your contributions and leave it alone. This is not negligence. This is the strategy if you want to be a finance bro about it. Peace of mind if you want to be normal about it.

I fear not the man who has practiced 10,000 investments once, but I fear the man who has practiced one investment 10,000 times

The fear of investment risk is often bigger than investment risk itself, especially for people investing in diversified funds over long time horizons. Not zero, not nothing to worry about, but probably more manageable than the small print makes it sound. You're allowed to start small, and pick a conservative fund before building up your confidence as you go. 

You're allowed to feel a bit weird about it at first. That's normal. That's just what it's like to do something you haven't done before.

The trick isn't to eliminate the risk. It's to understand it well enough that it stops running the show.