While many investors focus on the potential returns that are achievable with their hard-earned cash, considering both risk and return in equal amounts could be a worthwhile move. Doing so could allow them to avoid major losses, while still generating an impressive return on their capital.
Focusing on risk may make the National Lottery and Bitcoin far less enticing. Although their potential rewards may be high, it is possible to lose large amounts of capital on them over the long run.
While a Cash ISA may have low risk compared to other investments, its return potential is limited. As such, investing in the FTSE 100 could be a shrewd move, since it may offer the most appealing balance between risk and reward for investors who are looking to retire richer.
While Bitcoin has surged 64% higher since the start of the year, there is a continued risk that it could experience major declines. Its lack of scope to replace traditional currencies as a result of its limited size and inadequate infrastructure means that it is wholly reliant on supply and demand when it comes to its pricing. Should investor sentiment deteriorate, as happened in 2018, there is a risk that the price of Bitcoin could decline dramatically.
Similarly, the National Lottery may offer the prospect of winning vast sums, but the odds of achieving this goal are extremely low. In fact, there is a one in 45 million chance of winning the National Lottery, which suggests that many people may be better off investing their capital elsewhere.
While a Cash ISA does not pose the threat of losing money, it also lacks the potential to generate high returns. In fact, the very best returns on a Cash ISA currently stand at around 1.5%, which is below the rate of inflation. This means that over the long run, any amounts invested in one may lose their purchasing power, and fail to provide an investor with the financial freedom they seek in older age.
Furthermore, interest rate rises may only be prompted by a higher rate of inflation. This could mean that the returns on a Cash ISA remain lower than inflation even if the Bank of England decides to tighten monetary policy over the coming years.
The FTSE 100 provides the opportunity to generate a dividend yield of over 4% at the present time. As well as this, the index has risen more than seven-fold since its inception in 1984, which shows that over the long run it has the potential to post high total returns. As such, it could make a real difference to the financial prospects of retirees.
Certainly, there is an omnipresent risk of capital loss when investing in the FTSE 100. But for investors who are able to take a long-term view, the FTSE 100 has a solid track record of recovering from bear markets. It has always delivered a successful turnaround after even the most challenging of periods. As such, while it is riskier than some other assets, its return prospects mean that it could have the most appealing risk/reward ratio over the long run.
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