You probably prefer to avoid taking risks with your money.
The problem is that if you want to build wealth, some risk is not only inevitable, it can actually be positive.
At Continuum we are looking at risk, and how you can feel comfortable with it.
All investments are a risk
Savings in a recognised bank or building society are protected by the government’s deposit guarantee scheme. Investments, on the other hand, have no guarantees. You risk not getting back as much as you planned for, not getting back as much as you invested – or in extreme cases not getting back anything at all.
But investment risk has an important benefit. As a rule of thumb, the higher the risk, the higher the potential returns.
The same principle applies to investments like bonds. A bond issued by the UK government (a gilt) can be considered as safe. A bond from a business in desperate need of funding is a much higher risk – but the business issuing it may offer a much higher return to make the risk worthwhile.
Low-risk investments usually restrict you to low, steady returns. Higher risk may mean the chance of higher returns that arrive much faster, but may also carry a higher risk of loss. You need to understand the potential risk of any investment before you make it.
Paradoxically, not taking enough risk with your investments actually creates a new risk. You may not lose money, but you risk not making enough to achieve your financial goals.
You actually need some level of risk. The challenge is getting the level of risk that is right for you.
Part of the solution is to have a spread of investments. Some can be low risk, some moderate risk, and some frankly speculative. How much should fall into each category will depend on you and your financial circumstances. The second part is to get some professional help to understand the risk that is right for you.
But what risk is right for you?
Your attitude to risk can depend on a number of factors. The first is temperament.
If you have trouble sleeping when the FTSE falls a few points, you may be a cautious investor, and your exposure to high risk investments should be small. If you are prepared to take more risk in the hope of getting to your financial objectives faster, you may be happy with some more speculative holdings in your portfolio.
The second factor is time. If you are young and have plenty of time to recoup any investment losses, you may be able to take relatively high risks. If things go well, you can get your portfolio off to a good start. As the years roll by, you may feel more comfortable putting more of your holdings in less volatile stocks, where the money you have built up is relatively safe.
At Continuum, we talk with our clients to understand their Attitude To Risk – ATR. Once your adviser established your ATR, they can use it to develop an investment plan that is focussed on your needs.
This will mean a portfolio designed to deliver the optimum risk-return that you will feel comfortable with, while still meeting your wealth creation objective.
To discuss your investment plan, and to get some help with understanding your own ATR, contact Continuum. Our professional team are ready to help.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
When investing your capital is at risk.
The value of investments can fall as well as rise and you may get back less than you invested.