Demystifying the risk of investing - part 3

Understanding the risks you face as an investor can enable you to build your confidence and take the leap.

Investing doesn’t mean you have to take a leap of faith, you should go in with your eyes open to the returns you want to make and the risks that you are prepared to face.

The biggest thing most people fear is losing their money.

Many people hoard money in cash because they fear uncertainty, so understanding where the ups and downs come from can help you, as a potential investor, to manage your fears.

Part 1 discusses default and volatility risk, getting under the bonnet of how you can lose your money, to enable you to realise that this isn’t the biggest risk you face. Read more here

Part 2 discusses the elephant in the room, inflation risk. There is a common misconception that cash is king. However, inflation creates uncertainty over the real value of your money over time. We don’t tend to fear the impact of inflation because we don’t see the actual value of our cash diminishing in value, a £1 still says it is £1 in our bank account, even if it is worth just 98p in real terms. When we should fear the impact. Especially if we are to maintain our purchasing power over the long term. Read more here

This leads us part 3 of demystifying the risk of investing

To bring this to life I am going to talk about the great investment debate, property investing vs the stock market.

I often get asked about the benefits of investing in physical property instead of the stock market.

Having something physical, like property, makes us feel more secure.

Which leads nicely on to liquidity risk. Liquidity risk is the risk that you can’t sell your investment when you need to.

There are a number of issues you face with owning physical property:

  • When you want to sell you need to find a buyer.

  • It takes time for the sale to go through and the length of time is uncertain.

  • The price is only what someone is willing to pay.

  • You can’t easily sell parts of your property to raise cash, it usually involves liquidating the entire holding (unless you re-mortgage for example).

  • Costs of selling can be high, due to legal fees, plus potential tax on any capital gains.

If you can’t find a buyer you could be left short. I understand there are financing options, such as re-mortgaging your property, but this can’t be easily unravelled and can also be expensive to arrange. However, my intention here is to raise the issue of liquidity.

When you invest into the stock market and hold a portfolio of investments this can be more flexible:

  • The investments are usually traded daily on an exchange.

  • You have the ability to access your money at the touch of a button or over the phone when you want to, with returns usually paid to your bank account within a few weeks.

  • You can liquidate parts of your portfolio.

  • You have greater control on when you trade.

  • You can more easily manage your costs, such as the tax you pay. Whether you’ve invested through an ISA or not, you can spread any capital gains across tax years. Physical property tax isn’t so easily managed in this way because, for example, you can’t hold residential property in an ISA.

Although stock market returns are uncertain, and often volatile, so is the property market. We just don’t think about it because we automatically assume we will buy and hold for the long term. This means we don’t check the price of our house each and every day, in the way we are able to with our stock market investment when both should be considered long term investments.

Your stock market portfolio can be more flexible and tax efficient compared with physical property. It can be easier to manage and, fundamentally, you can access your stock market investment at the touch of a button. Yes, the value may have fallen, so you can leave your money to recover or suffer the loss if you absolutely need to access your money.

But at least property investing can pay a regular income.

Yes, absolutely, and so can your stock market investment. You can set it up to pay out the income it generates, and you can cash in your capital gains whenever you want.

Conversely, you have the flexibility to reinvest your investment income automatically, which is very powerful over time due to the impact of compounding.

With property income, you have to make a decision to do something with it. Property requires a lot more management.

I personally believe that if you have the means, property investing alongside stocks and shares is a very wise strategy. However, I also feel that, if your goal is to create more freedom, then a stock market investment can be more flexible and easy to manage.

So join me for part 4, the final instalment, where I will cover the ways that you can manage the risks of investing.

This blog is based on my expertise and opinion, and is for information only. It is not advice. I do not know your personal circumstances.

How to get in touch

If you would like to learn more about investing, as a financial coach, I can help you to understand more about your money and help you to invest with confidence.

Email me at to arrange a discovery call.

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