Understanding Risk

Understanding the risk/reward relationship and working out how much risk you are comfortable taking is an important part of investing.

As a general rule, the more risk you take the greater the potential return, but also the greater potential loss.

Please remember that the value of investments can go down as well as up. There is also the risk that you may not get back what you put in.

Investing goals and risk tolerance

Key things for investors to consider.

What's your attitude to risk?

Are you cautious or adventurous or somewhere in-between? How would you feel about your investments fluctuating in value? Consider, too, how much money you could afford to lose.

What are you investing for?

A short-term goal like a new car or a holiday? Or a long-term one, such as a child's education or your retirement?

What's your time horizon?

If you're investing for a long-term goal often regarded as 5-10 years or more, you might take more risk for potentially higher returns as you have time to ride out market up and downs.

Different levels of risk

Each asset class carries a different level of risk. In order of low to high risk they are generally seen as:

Cash » Fixed Income* » Property » Equities** » Other asset classes
*bonds, ** stocks & shares

Spreading risk and diversification

Investing across different asset classes helps to spread risk. This is called diversification.

Being cautious

Playing safe could also carry risk. Keeping your money in a building society or savings account carries minimal risk, but inflation could erode its value and you could miss out on greater returns.

Investing regular amounts can help you to benefit from the ups and downs of the stock market and give you the reassurance of smoother returns.

Warning
Risk warning - Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.