Dispel the myth of passive income

None of us likes to gamble with our savings, but the truth is that there’s no such thing as a ‘no-risk’ investment.

At the heart of investing there is a simple trade-off: the more risk you take, the more you can get back or lose (and the lower the risk you take, the less you’re likely to get back or lose).

But while you’re always taking on some risk when you invest, the amount varies between different types of investment.

Money you place in secure deposits such as savings accounts risks losing value in real terms (buying power) over time.

This is because the interest rate paid won’t always keep up with rising prices (inflation).

On the other hand, index-linked investments that follow the rate of inflation don’t always follow market interest rates.

This means that if inflation falls you could earn less in interest than you expected.

Stock market investments are generally expected to beat inflation and interest rates over time, but you run the risk that prices might be low at the time you need to sell.

This could result in a poor return or, if prices are lower than when you bought, losing money.

When you start investing, it’s usually a good idea to spread your risk by putting your money into a number of different products and asset classes.

That way, if one investment doesn’t work out as you hope, you’ve still got others to fall back on.

Returns are the profit you earn from your investments.

Depending on where you put your money it could be paid in a number of different ways:

dividends (from shares)
rent (from properties)
interest (from cash deposits and fixed interest securities)
the difference between the price you pay and the price you sell for – capital gains or losses.
With an instant access cash account you can withdraw money whenever you like and it’s generally considered a secure investment. The same money put into fixed interest securities, shares or property is likely to go up and down in value but should grow more over the longer term, although each is likely to grow by different amounts.

The various assets owned by an investor are called a portfolio.

As a general rule, spreading your money between the different types of asset classes helps lower the risk of your overall portfolio underperforming – more on this later.

There are several different ways of investing. Many people invest through collective or ‘pooled’ funds such as unit trusts.