Making informed decisions to improve your chances of achieving your financial goals.
Your investment time frame will determine your risk profile to some extent, as this has a direct bearing on your capacity to take risk. Risk capacity is also influenced by factors such as your age, wealth, and the goals you are saving and investing for. Your capacity for risk is likely to change over the course of your life as your personal circumstances change.
If you understand the risks associated with investing and you know how much risk you are comfortable taking, you can make informed decisions and improve your chances of achieving your goals.
Risk is the possibility of losing some or all of your original investment. Often, higher risk investments offer the chance of greater returns, but there’s also more chance of losing money. Risk means different things to different people. How you feel about it depends on your individual circumstances and even your personality. Your investment goals and timescales will also influence how much risk you’re willing to take. What you come out with is your ‘risk profile’.
Different Types of Investment
None of us like to take risks with our savings, but the reality is there’s no such thing as a ‘no risk’ investment. You’re always taking on some risk when you invest, but the amount varies between different types of investment.
As a general rule, the more risk you’re prepared to take, the greater returns or losses you could stand to make. Risk varies between the different types of investments. For example, funds that hold bonds tend to be less risky than those that hold shares, but there are always exceptions.
Losing value in real terms
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 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.
Inflation and interest rates over time
Stock market investments might 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.
You can’t escape risk completely, but you can manage it by investing in the long term in a range of different things, which is called ‘diversification’. You can also look at paying money into your investments regularly, rather than all in one go. This can help smooth out the highs and lows and cut the risk of making big losses.