You can’t invest without risk. Unlike savings, protected by the government’s deposit guarantee scheme, there are no guarantees with investment. You could run the risk of not getting back as much as you hoped, not getting back as much as you invested – or even not getting back anything at all.
But investments should not be a gamble. You can decide what level of risk you are comfortable with – and make your investments accordingly. In fact, understanding what risk any investment presents is essential before you make any decision to invest.
Investment risk can be high or low. A cash ISA can be considered as low risk. A high risk investment might be a small technology startup stock – which could either be the next Google, or fail completely.
Can’t you just play it safe?
You may have to be prepared to take on some risk to get the kind of returns you want. For many cautious investors, not taking enough risk actually creates a risk – the risk that you will not get the returns you need. You may not lose money – but you may not make enough to achieve your financial goals.
What risk suits you?
At Continuum, we always talk with our clients to understand their Attitude to Risk (ATR) – before we start preparing any kind of investment plan.
We know that some people are by nature more cautious than others. But the risk you will be happy to take on will actually depend on many other factors other than personality, such as your age.
When you are younger, you may be happy to take on high-risk investments. You have plenty of time to make up any losses, and if things go well, you have a good return to get your portfolio off to a good start.
As you get older, with less time to make up any losses, you will probably want to take a more conservative approach. You won’t want to take risks with the money you have spent decades building.
Your risk profile will therefore change over time. Generally, the longer you have to invest, the more risk you can afford to take. So, as a twenty-something you shouldn’t be using a cash ISA or government gilts to try to build your wealth.
Your Attitude to Risk (ATR)
Our state-of-the-art technology allows us to work out your current ATR with the aim of providing a comfortable investment journey, with a level of risk that you feel comfortable with at any given time.
At Continuum, our technology is used as a starting point for a face to face discussion, which will be the real way to build an in depth understanding of your attitudes and aims.
We have found that some people overestimate risk tolerance at first. Others are initially risk averse and then revise their approach to achieve their long-term goals.
Once your adviser has developed a clear risk profile for you and established your ATR, it can be used as the basis of an investment plan. This will mean a portfolio designed to deliver the optimum risk-return that you will feel comfortable with, while still meeting your wealth creation needs. It might involve different risk parameters for different pots of money. You could for example keep your pension low risk with smaller, more aggressive investments alongside.
Spreading your investments makes good sense. Low, medium and high investments all have their place in a balanced portfolio.
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.
The value of investments can fall as well as rise and you may get back less than you invested.
Equity investments do not afford the same capital security as Deposit based investments.