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Investment risk – how risky is your portfolio?

We look at why taking more risk with your investments doesn’t always pay off, and how to spread risk across your portfolio.

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.

Whether you’re new to investing or have been doing it for decades, managing risk is one of the key investment principles.

Finding the right balance between risk and reward can be tricky. If you take too much risk, you could leave yourself exposed to big drops in your portfolio. Not taking enough risk could mean your investments don’t grow quickly enough to meet your financial goals.

This article gives you information to help choose the right level of risk for you, but it isn’t personal advice. If you need help with this or if you're not sure an investment is right for you, we have experienced financial advisers who can help.

High risk, high reward?

Risk is a certainty when investing. It’s unavoidable. All investments carry a degree of risk – some higher than others.

When we refer to how risky an investment is, we usually mean the chance it will fall sharply in value – also known as volatility. The biggest risk you take when you invest is losing money.

All investments could fall in value and not rise again, leaving you with less than you’d originally invested. But it’s those higher-risk investments that can be particularly painful to watch when markets take a turn for the worst. Sometimes that type of investment might not match how much risk you thought you were happy taking.

FTSE 100 vs FTSE 250 - Financial Crisis 2008

Past performance isn’t a guide to future returns. Source: Lipper IM to 31 December 2009.

We saw this play out during the financial crisis in 2008 when the FTSE 250 plummeted at a sharper rate than its larger counterpart – the FTSE 100. As the FTSE 250 is the biggest 250 companies after the FTSE 100, the companies are smaller and more volatile.

But if you’re able to sit tight and ride out the market waves that come with higher-risk investments, you could be rewarded. In most cases, the more risk you’re prepared to take, the higher the potential profit although of course there are no guarantees.

The graph below shows how the FTSE 250 has outperformed the FTSE 100 over the long term – offering a profitable reward for those investors willing to take more risk. Past performance isn't a guide to the future.

FTSE 100 vs FTSE 250 (2000-2020)

Past performance isn’t a guide to future returns. Source: Lipper IM to 31 December 2020.

Returns aren't guaranteed

The relationship between risk and reward doesn’t always hold true. Higher expected returns are only expected – not guaranteed – and not all risks are rewarded. As investments become more speculative, the chance investors could lose money becomes greater.

In fact, the FTSE AIM index – which is made up of some of the higher-risk, smallest listed UK companies – has performed the worst out of all the main indices over the last 20 years*.

UK Stock Market Performance (2000-2020)

Past performance isn’t a guide to future returns. Source: *Lipper IM to 31 December 2020.

Although these high-risk investments might be more exciting, it’s important to balance out your portfolio with less adventurous investments.

Taking a long-term view and diversifying your portfolio across larger and more established businesses could be a better choice to withstand these ups and downs. It could soften the blow to any painful setbacks your riskier investments might take.

As Warren Buffett, one of the most successful investors of all time, put it “If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.”

That’s not to say you can’t take risks when you invest. Just make sure those riskier investments are only making up a smaller part of your portfolio. Your investments will fall as well as rise in value, so you could make a loss.

Consider taking a core-satellite approach

Hand-picking a mix of different investments to match your attitude to risk and investment goals can be tricky, even for the most seasoned stock pickers.

While there’s no one-size-fits-all approach, we think a core-satellite strategy is great for lots of investors.

The core is your main group of investments – a mix of investment types that match your risk profile. This should be the bulk of your portfolio. Usually a sensible mix of funds.

A fund is a collection of investments, chosen and run by the fund manager who’s trying to achieve the fund’s investment objective. An active fund will try to beat the performance of the fund’s benchmark. A passive fund (tracker) will try to track the performance of the fund’s benchmark as closely as possible. Funds come in all shapes and sizes so it’s easy to build your own portfolio to suit your goals and risk profile.

Mixed investment funds can be a great way to spread your money across lots of shares, bonds and money markets – helping you achieve greater returns with a relatively lower-level of risk. For investors searching for added risk, small and mid-sized companies funds can offer you an adventurous, but high-risk, way to grow your wealth.

Your core investments could be surrounded by smaller satellites. These satellites might be made up of shares in individual companies that you think might perform well over the long term. Make sure you understand the companies you’re choosing. If the company fails, you risk losing your whole investment.

Although individual shares carry more risk, holding them as a small part of a bigger portfolio reduces the overall impact if they do perform badly.

If you’re happy to build your own portfolio but just need some fund ideas, you could take a look at our Wealth Shortlist.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Key points for managing risk

  • Own a mixture of different investment types (like shares and bonds)
  • Adjust how much you have invested in shares and bonds based on your tolerance to risk
  • Always own investments with a long-term view – at least 5 years

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 dealing

AXA WF Framlington UK Index Key Investor Information Document

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 dealing

Baillie Gifford Managed Key Investor Information Document

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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.

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