Helping you understand investment risk and explore your attitude to it
When it comes to risk - everyone’s different. Some people love bungee jumping off a bridge, but others wouldn’t even contemplate doing such a thing. The same is true with investments.
Some people are happy to take more risks for higher potential rewards; others are more cautious, preferring less potential reward for accepting less risk.
As risk can mean different things to different people, this section will help you better understand risk and your own attitude to it.
Six steps to understanding risk
Please click through and read each of the six steps carefully.
1. What is investment risk?
- Risk is the possibility that you might lose some or all of the money you invest. That might be something you’re comfortable with, but it could be something that doesn’t sit well with you.
- That’s why it’s important to understand the levels of risk you’re taking on when you invest. You need to be happy with the risks you’re taking.
2. How does risk affect my investment?
- There’s a link between the level of risk you take and the rewards you could earn. In general, the higher the risk, the greater the potential rewards. On the flip side, lower risk investments are safer, but offer less in the way of reward.
- For example, putting your money in a bank account carries little risk. Rising prices in the form of inflation may mean your money buys you less in the future. The bank could go out of business. But that’s about it for risk in savings and deposit accounts.
- On the other hand, if you invest in shares or investment funds, the risk increases, because they go up and down in value. That means you could gain money, but you could also lose money. In the worst case scenario, you could lose everything you invested. Mind you, if things go very well, you could make a lot of money on top of your original investment.
3. Understanding your attitude to risk
- Nobody but you knows what level of risk you’re comfortable with, but you might find that hard to pin down when you want to invest.
- We’ve got a number of profiles outlining different types of investors and the level of risk they are likely to be comfortable with. You might find it helps to read through these and see which one best describes you.
- Explore our risk profiles
4. Why should I try to spread the risk?
- That old saying of ‘don’t put all your eggs in one basket’ holds true for investing.
- If you invest in just one type of asset and it doesn’t perform as well as you expected, you could find yourself in a bad position. But invest in several types of asset and you spread the risk. Also known as diversifying your portfolio, this means when one asset isn’t doing so well, another could be doing much better and helping to balance out the poor performance.
- Taking a high risk approach to investing may lead to a high pay-off, but it might also lead to a loss as your investment has a greater chance of coming unstuck. A low risk approach may be safer, but won’t bring in as much reward. However, by balancing your investments between higher and lower risks, you could have the best of both worlds.
5. How much can you afford to lose?
- You need to think about this one carefully before you invest. How would you feel if you lost some or all of the money you’re thinking of investing? Would you be able to manage? Would you be devastated or could you shrug it off and accept it’s part and parcel of investing?
- Unless you put your money in a bank or building society account, you always run the risk of losing some or all or your investment.
- If that bothers you, you can manage that risk by choosing lower risk investments. If taking a risk is second nature to you, you might be perfectly happy to chance losing some or all of your money. Ultimately, it’s all down to you and how you feel.
6. How long are you investing for?
- This is a big part of your investment decision. If you can, try to invest your money for as long as possible as it gives it more time and opportunity to grow.
- A general rule of thumb is to invest for at least five years. So, if you think you’ll need to get your hands on that money before that or in an emergency, it’s time to think again about investing. You’ll probably find that a deposit account suits you better.
- If you can leave your money in place for at least five years, take a look at our investment options.
Talk to an adviser
We can’t offer you advice on your personal situation.
For that, you’ll need to talk to a financial adviser. If you already have one, we highly recommend that you give them a call and set up an appointment. If you don’t have an adviser, you can find one in your area through unbiased.co.uk.
Explore our risk profiles to help you better understand your attitude to risk.