The three most important things to think about when deciding what to invest in are risk, return and cost.
The story goes that Albert Einstein once called compound interest the eighth wonder of the world, saying “He who understands it, earns it; he who doesn't, pays it”.
Whether or not those are actually his words, it’s true that compound interest is a powerful effect of investing that, over time, will get your money working for you.
Risk isn’t bad; it’s a normal part of investing. It’s the chance you take you won’t get the return you expected, or that you might lose some or all of the money you invested.
All investments have different levels of investment risk. Property and shares are generally higher risk than bonds and cash for example.
Higher risk investments have a lot more ups and downs so you’d expect your returns to rise and fall more frequently and in larger amounts. It’s hard to predict how they’ll perform, but if you’re investing for at least 10 years you should end up with a larger amount than if you’d taken less risk.
Lower risk investments have fewer ups and downs over time. But if you invest in lower risk products it’s possible your money won’t grow as fast as inflation. This means your money could be worth less when you eventually spend it.
As well as volatility, general investment risks include
Our ways to invest pages explain how to manage the risks associated with specific types of investments.
Taking on risk is what you’re getting paid for, through investment returns. When you take on more risk, you should get paid more in return.
Risk is only bad if
Understanding your investing goals, your attitudes to risk, and then protecting yourself by having more than one type of investment can all help you manage risk.
Return is the money you make on an investment. When choosing investments, you need to consider whether the return is going to be enough to help you reach your goals.
Our ways to invest pages explain the benchmarks that are associated with specific types of investments. If an investment typically performs well in excess of its benchmark, it could be a sign there is a higher level of risk.
Investments aren’t free, even if you invest directly. Any fees you pay reduce the return you make, so you should understand them before you invest.
Our ways to invest pages explain the fees associated with specific types of investments.
If you’re using a financial adviser or broker, they may also charge you a fee for their services. See paying for advice.
The example below shows the difference fees can make to total return – the investment with lower fees delivers a return that’s $1,794 higher than the more expensive option.
Only pay higher fees if you’re confident you’ll be persistently rewarded with returns high enough to make it more financially worthwhile than an investment with lower fees.
For example, if you were confident that by paying the higher 1.25% fee, you’d make a 7% return on your $10,000 investment, it would be worthwhile. This is because your return after fees would be higher than if you’d paid lower fees and achieved a 6% return.
Financial advice can help you identify what you need, what’s right for you, and make sure you’re aware of the risks of certain investments or different types of insurance protection. This is all about helping to set yourself up for the future. See our Getting financial advice page for more information.