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  • Risk – what you need to know

    We take a closer look at why understanding and managing risk is an investing essential.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    What is risk?

    Imagine you're going on holiday. You know they’re expensive, and not technically necessary. But they give you experiences you don’t get at home – whether it’s breath-taking scenery, exciting activities, or just having someone else do the washing up.

    If you think it’s worth it, you’ll pay for the reward of a good time, and good memories. But there’s always a risk it won’t turn out so well. The airline could lose your luggage, your hotel might not look like the pictures, or you might not see any animals on safari.

    So you might not want to risk your money. You can always choose to stay at home. That’s a bit like holding cash. It’s relatively safe, but it’s also unspectacular. You get what you pay for.

    In the investing world, ‘risk’ is the potential downside of an experience you can’t get anywhere else - growth you won’t get from cash in a bank account. The ‘price’ is uncertainty, and patience.

    Investments will rise and fall in value.

    But risk isn’t your investments falling. It’s the idea that they might not rise again or you might get back less than you invest.

    Investments go down - that’s their risk. But over the long term they could go up, and as long as you’re willing to be patient, we know that many investments have paid investors back over the long term. It’s never a certainty, and depending on the investment, it can be a bumpy ride. Taking on more risk could give you more reward – but bigger losses.

    What does risk look like?

    On a basic level, different investments carry different levels of risk.

    Cash is low risk but can often come with a low reward. Investing in shares comes with a higher risk but could offer a higher reward.

    Investments which have a higher chance of greater returns are likely to give you a bumpier ride along the way. Lower-risk investments tend to be steadier, though in general you can’t expect as much of a return.

    You can’t rely on one type of investment to give you the returns you need. To reduce the ups and downs, the best way is to spread your assets.

    Below you can see some examples of what a portfolio might look like at different risk levels – in its best and worst years. It’s just a guide to illustrate a point, and not an indication of how you should invest.

    Important: you should look at how much the portfolios at certain levels of risk have gone down in value in the past, and ask yourself how you’d feel if it happened to you.

    What’s in the portfolio? Best calendar year return % Worst calendar year return % Biggest loss
    Cash 100% cash 4%
    2007
    0.3%
    2017
    0%
    Lower Risk 70% government bonds

    20% UK shares

    10% global shares
    18.6%
    1998
    -1.8%
    2001
    -7.75%
    Medium Risk 40% government bonds

    30% UK shares

    30% global shares
    18.9%
    1997
    -11.8%
    2002
    -24.42%
    Higher Risk 0% government bonds

    50% UK shares

    50% global shares
    27.6%
    1999
    -24.8%
    2008
    -45.56%

    Past performance is not a guide to the future. Source: Lipper IM 1997-2019.

    Risk can be an opportunity, not just a negative

    You can only earn higher returns by taking on more risk. It’s as close to a law as you’ll get in investing.

    But it won’t be a smooth ride of upwards growth. Your portfolio will definitely go up and down along the way. Sometimes, these ups and downs will be big. It’s how many of the ups and downs you’re happy to deal with which is your attitude to risk.

    Being realistic about what you’re expecting to gain might help you work out the kind of risk you’d have to take on to get there. If you’re not happy with both the gains and the potential ups and downs, then you might have to adjust your expectations.

    Think back to your holiday. You might have got sunburnt, or bitten by mosquitoes – but did the good memories outweigh the bad ones?

    Understanding risk – why company size matters

    How do I manage risk?

    In investing, you can make room for error by diversifying your investments. So when one investment goes through a bad patch, hopefully, there will be others which are doing well.

    And you need to set aside enough cash for emergencies. We usually suggest 3-6 months’ expenditure is a good starting point.

    What you can control

    • How well you’ve diversified your portfolio

    Diversification is a tool to help you manage risk, when you have no way of knowing what’s going to happen.

    • Staying invested long term

    That’s at least 5-10 years. If you take your money out by reacting to short-term noise, you risk buying investments back at the wrong times.

    What you can't control

    • Short-term noise, and what’s going on in the news

    What’s going on around us causes us to make decisions – but it doesn’t mean they’re the right ones for your personal goals.

    • How your investments perform

    Stock markets are unpredictable, and you won’t always get things right. Although, holding a mixed bag could mean you’ve always got something performing well.

    Need help managing risk?

    Our investment research team have put together some investment ideas to help you get started, but they’re not a personal recommendation to buy.

    Mixed investment funds can be a great way to spread money across lots of shares and bonds – helping achieve greater returns with a relatively-lower level of risk.

    For investors prepared to accept more risk, small and mid-sized companies funds can offer you an adventurous, but higher risk, way to grow your wealth.

    Investing in funds isn’t right for everyone. Before investing it’s important to check the fund’s objectives align with your own, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment.

    Remember, funds go down as well as up in value, so you could still get back less than you put in.

    Investment ideas

    AXA WF Framlington UK

    • Invests in UK companies across a range of sizes.
    • Focuses on high-quality companies.
    • Invests in higher-risk small and medium-sized companies.

    Find out more

    Find out more

    Baillie Gifford Managed

    • Can make a great core for most growth-focused portfolios.
    • Investments from around the world.
    • Could boost the growth of a more defensive portfolio.

    Find out more

    Find out more

    AXA WF Framlington UK

    This fund invests in UK companies across a range of sizes. The fund manager looks to pick companies he thinks have lots of potential to grow over the long term – though of course there are no guarantees.

    The fund invests more in higher-risk small and medium-sized companies than some other funds. When building a well-rounded portfolio for long-term growth, think about balancing with funds focused on more established companies.

    The manager's focus on high-quality companies means it could also sit well alongside a fund that invests in companies believed to be overlooked and undervalued. His focus on broader themes and the way they impact individual companies makes it quite different to other funds.

    This is an offshore fund, so investors aren’t normally entitled to compensation through the Financial Services Compensation Scheme.

    More about this fund, including charges and how to deal

    AXA WF Framlington UK Key Investor Information

    Baillie Gifford Managed

    We think this fund can make a great core for most growth-focused portfolios. It invests in companies across the world and has a huge amount of diversification in one investment. It also invests in some bonds as well as cash, which could reduce volatility when markets get tougher.

    Shares tend to make up more of the fund than others in the same sector, so it’s more adventurous than lots of other mixed-asset funds.

    When investing in companies, the managers look for businesses they think have lots of growth potential and take a truly long-term view.

    It could boost the growth of a more defensive portfolio with a focus on bonds or add a little stability to a portfolio focused on shares. The fund can invest in derivatives and emerging markets, which can increase risk.

    The fund currently has a holding in Hargreaves Lansdown PLC.

    More about this fund, including charges and how to deal

    Baillie Gifford Managed Key Investor Information

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Learn more about investing

    Category: LEARN ABOUT INVESTING

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    Category: Investing essentials

    Diversification: what you need to know

    Category: Investing essentials

    Risk: what you need to know

    Category: Investing essentials

    Investing behaviours: what you need to know