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Investment risk sounds scary. But is it really?

We look at how a better understanding of risk can let you invest with more confidence.

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 it’s property, shares, funds or bonds, there’s a degree of risk to every investment. Even cash isn’t risk-free – if your interest rate doesn’t keep up with inflation, your spending power is being eroded.

Because you can’t avoid risk, the next best thing you can do is identify how much of it you can handle.

This article isn’t personal advice and if you’re not sure if an investment is right for you, please take professional advice. All investments fall as well as rise in value, so you could get back less than you invest.

How to balance high and low risk investments

How would you feel if your investments lost a quarter of their value? A third? Half? How long could you wait for them to potentially recover and how much can you afford to lose?

These are the questions you should ask yourself when you’re trying to work out how much risk you can take in your portfolio.

You’ll need to have a good understanding of your short- and long-term financial plan to establish how much of your savings you’ll need, when you’ll need them and how long you’ll need them to last.

For example, someone 30 years from retirement with enough money tucked away in cash ISAs could probably afford to include some higher risk investments elsewhere in their portfolio, provided they’re investing for the long term (five years or more).

On the other hand, if you’re close to retirement or you know you’ll need your invested money soon, you’ll likely need a lower risk portfolio with access to your investments.

Four things to think about when balancing the risk in your portfolio

1. Decide how much cash to hold

We always think keeping an emergency cash reserve makes sense. Generally, we recommend holding enough cash to last three to six months, to cover your essential costs and unexpected emergencies. But beyond that, the risk of inflation eroding the value of your cash over the long term means that holding too much cash can be a costly mistake.

2. Establish an asset class recipe

Allocating your money between ‘asset classes’ like shares, bonds and cash is a tricky aspect of investing to get right. You may have read a certain amount of ‘conventional wisdom’ on which asset classes are high risk and which ones aren’t.

The reality is, that market conditions change all the time and when you dig in to the pros and cons of asset classes, you might find that it’s not as straightforward as you first thought.

For example UK government bonds have always been thought of as a very low risk asset, but with yields now so low, prices have become more volatile than they have been historically.

Getting the right mix of asset classes in your portfolio is something a good financial adviser can help you with, so if you’re not sure, please ask us for help.

3. Determine capacity for loss

Capacity is in many ways logical and scientific. Can you afford to accept the proposed level of risk with the investments in question?

Often overlooked is the other side of the coin – can you afford to take the risk that your investments won’t grow fast enough to meet your goals.

Long-term investing is key here – the longer the timeframe, the greater the ability to ride out shorter-term fluctuations.

It’s also important to consider your broader financial situation. For example if you have a final salary pension scheme alongside a self-invested personal pension (SIPP), it’s likely you’ll be able to stomach more risk than someone relying on their SIPP alone.

4. Appreciate tolerance

While there is some science or logic to capacity, tolerance is purely subjective and emotive – how will you feel and behave when your investments fall in value?

History suggests that selling investments when they have experienced a sharp loss is often a bad idea. Markets can rebound sharply, as they did in the immediate aftermath of the EU referendum vote. Making a short-term, emotional decision risks selling at the bottom and potentially missing any rebound. Remember though, there are no guarantees and past performance isn’t a guide to what will happen in the future.

‘Invest’ in knowledge

One of Warren Buffett’s many famous quotes is “Only invest in what you know”. If you’re not confident in your investment knowledge we can help.

Our getting started section is a great kicking off point, and we offer a wide range of free guides for those with a particular area they’d like to brush up on.

But if you don’t have much time on your hands, an adviser can help you understand your options and how much risk you can take with your portfolio.

Why not find out more about our advice service by calling our advisory helpdesk. They won’t be able to give you personal advice but they can help you identify where you might need some help and point you in the direction of how best to get that help.

book a call back

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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