We want to be sure our money is safe. We worked hard enough to make it in the first place, we don’t want to put it in jeopardy by investing in something which could lose it all.
But if you want to build wealth, some risk is not only inevitable, it may also be positive.
At Continuum we are looking at risk and if used appropriately, how it can be a vital tool and how you can feel a little more comfortable with it.
Investments are a risk
Savings in a bank or building society are protected by the government’s deposit guarantee scheme. If the bank were to fail, the scheme would pay back up to £85,000 without a murmur. Your money is safe.
Investments, on the other hand, have no such guarantees. There are risks. You risk not getting back as much as you expected, not getting back as much as you invested – or in extreme cases not getting back anything at all.
Why take that risk?
The simple answer is that the potential of greater rewards may make the risk worthwhile considering. As a rule of thumb, the higher the risk, the higher the potential returns.
A bond issued by the UK government (a gilt) can be considered as safe as the Bank of England itself, but the returns will be relatively modest. 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 and potential investors can consider whether taking the higher risk of loss is worthwhile.
A conservatively managed Stocks and Shares ISA might be low risk. Individual shares in a technology startup (which could be the next Google or fail completely) are high risk.
There is a risk/reward balance. Low-risk investments usually restrict you to low, steady returns. Higher risk may mean the potential of higher returns over a medium to long term period and potentially the risk of greater losses.
You need to understand the potential risk of any investment before you make it.
Should you take some risks?
You may need some risk with your investments. Not enough risk may mean that the chance of losing money is less but can also mean that the outcome is a lower return.
How much risk? If you have trouble sleeping when the FTSE falls a few points, you may be a cautious investor, and your exposure to investments which contain a higher element of risk, such as stocks and shares should be small. If you are prepared to take more risk in the hope of pursuing your financial objectives, you may be happy to consider more speculative holdings.
The right level of risk will change over time. In your 20’s using low risk investments like gilts or a cash ISA to build wealth may not be the most suitable strategy, as there is the risk that the returns may not be high enough to help you achieve your objectives.
As the years roll by, you can transfer your holdings into less volatile asset allocations, where the money you have built up is relatively safe. When you are approaching retirement, you should probably not put the wealth you have made into online startups.
So how do you deal with risk?
Part of the solution is to have a spread of investments – called diversification. Some can be low risk and some of a higher risk. How much should fall into each category will depend on your attitude to risk and your financial circumstances.
The second part is to get professional help to understand the level of risk that is appropriate for you. At Continuum, we talk with our clients to understand their attitude to risk. Once your adviser has established this, we can develop a plan that is purely focussed on your needs and personal goals.
This will mean a portfolio designed to deliver the balance of risk and return that you feel comfortable with, while still meeting your wealth creation objectives.
Why take a risk? Call us today.
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. When investing your Capital is at Risk.
The Financial Conduct Authority does not regulate deposit accounts.