Savings & investment
Oliver Stone
When people think about investing, they often focus on potential returns.
However, every investment involves some degree of risk.
Understanding that risk, and ensuring it matches your personal circumstances and financial goals, is one of the most important steps in building a successful long-term investment strategy.
In simple terms, investment risk is the possibility that an investment does not perform as expected, or that its value falls.
In some circumstances, investors may receive back less than they originally invested.
While this can sound daunting, risk is not something to be feared. Instead, it is something to be understood, managed and aligned with your objectives.
Generally speaking, investments that offer the potential for higher returns tend to involve higher levels of risk.
Cash savings, for example, are usually lower risk because their value is stable, but they may struggle to keep pace with inflation over time.
Investments in shares, property or other growth assets have historically delivered higher long-term returns, but their value can rise and fall significantly in the shorter term.
The key is finding the right balance between risk and reward for your individual circumstances.
This is where professional financial advice can add significant value.
While risk can never be eliminated entirely, it can be managed.
One of the most effective tools available to investors is diversification.
Rather than relying on a single company, sector or region, a diversified portfolio spreads investments across different asset classes, geographical areas and investment styles.
This approach helps reduce the impact of any one investment performing poorly.
Professional investment managers also continuously monitor portfolios, assess economic conditions and review asset allocations to ensure portfolios remain aligned with their intended risk levels.
Strategic asset allocation, diversification and ongoing portfolio oversight can all help investors stay on track while managing the ups and downs that naturally occur in financial markets.
Risk is not static. The level of risk that may be appropriate at one stage of life may be unsuitable at another.
For example, someone in their 30s saving for retirement may have a long investment horizon and be comfortable accepting more short-term volatility in pursuit of long-term growth.
By contrast, someone approaching retirement may place greater emphasis on preserving capital and generating a reliable income.
This is why advisers look at several factors when assessing suitability, including a client’s attitude to risk, financial objectives, investment knowledge and experience, and capacity for loss.
In other words, how would you feel if markets fell, and how much impact could such a fall have on your financial plans?
Many investment solutions use risk scales to help investors understand the expected level of volatility within a portfolio.
For example, risk ratings often range from 1 to 10, with lower numbers typically representing more cautious portfolios and higher numbers representing greater exposure to growth assets such as equities.
A lower-risk portfolio may hold a greater proportion of cash and bonds, aiming to deliver more stable returns with less fluctuation in value.
Higher-risk portfolios typically hold more equities and other growth-oriented investments, which can experience larger short-term movements but may offer greater long-term growth potential.
Importantly, a higher-risk portfolio is not necessarily “better” or “worse” than a lower-risk one.
The most suitable risk level is the one that aligns with your goals, timescale and personal circumstances.
Successful investing is not about avoiding risk altogether.
It is about understanding the risks you are taking, ensuring they are appropriate for your circumstances, and maintaining a disciplined approach through changing market conditions.
With the right advice, a well-diversified portfolio and regular reviews, risk becomes something that can be managed effectively, helping to keep you on track towards your long-term financial goals.
A financial adviser can explain the levels of risk involved in investments and work with you to assess which investments are most suitable for your goals, your attitude to risk and your circumstances.
To explore investments further, get in touch with an adviser today.
Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and may change. The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is also not a reliable indicator of future performance. Always seek professional advice before making financial decisions.
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Investment risk is the possibility that an investment will perform differently from expected, including falling in value or producing a lower return than anticipated. In some circumstances, investors can receive back less than they originally invested.
The appropriate level of investment risk depends on factors including your financial goals, investment timeframe, financial circumstances, attitude to risk, knowledge and experience, and capacity for loss. There is no single level of risk that is suitable for everyone.
Investment portfolios are often described as lower, medium or higher risk, although the terminology and risk scales used by investment providers vary. Lower-risk portfolios generally have greater exposure to cash and bonds, while higher-risk portfolios tend to have greater exposure to equities and other growth assets.
Attitude to risk describes how comfortable you are with investment uncertainty and potential losses. Capacity for loss describes how much financial loss you could afford to sustain without significantly affecting your financial plans or standard of living.
Higher-risk investments generally offer greater potential for long-term returns, but this is not guaranteed. Higher risk also means greater potential for losses and larger fluctuations in value.
Yes. Your appropriate level of investment risk can change as your financial circumstances, goals, investment timeframe and attitude to risk change.
Diversification across different asset classes, geographical regions and investments can help reduce the impact of any individual investment performing poorly. Matching your portfolio to your timeframe and regularly reviewing it can also help manage risk.
Cash is generally less volatile than investments such as shares, but it is not completely free of risk. Inflation can reduce the purchasing power of cash over time, particularly when savings rates are below inflation.
As retirement approaches, investors may have less time to recover from significant market falls. The appropriate approach depends on individual circumstances, including when the money will be needed, income requirements and capacity for loss.
Financial advice can help you understand how much investment risk may be appropriate for your circumstances and how that risk fits within your wider financial plan. An adviser can also review whether your portfolio remains suitable as your circumstances change.
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Savings & investment
Savings & investment
Savings & investment
Savings & investment
Savings & investment
Savings & investment
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