There is no way to get rid of risk completely, but there are ways to manage it.
Volatility is a measure of risk. Assets that experience wide fluctuations in value are defined as high risk, but generally tend to produce the highest long-term performance. Very low risk assets (for example deposits) have the smallest fluctuations in investment return terms.
Spreading the risk
Utilising more than one asset class (such as an element of gilts to counterbalance a high equity holding) can reduce risk. The alternative, single asset class selection is a proven higher risk investment strategy that you may not feel comfortable with.
You spread your risk by putting your money into different kinds of assets and different funds that have different levels of risk.
You pool your investments through buying into funds that invest your money into a diverse range of assets.
Markets go up and down. For best results, you should look at investing your money for at least 5 to 10 years – and ideally for a longer period of time.
How do you feel about risk? You need to know this before you decide to invest money. We’ve outlined different kinds of investors, but here are some things to think about:
The more a fund invests in shares, the higher the potential returns AND the risk to your capital. This is a good way to identify a fund’s level of risk.
Before people decide to invest, we work with them to find out what kind of investor they are.
Which one are you?
The Defensive Investor
The Defensive investor may be very sensitive to short-term losses. A Defensive investor’s potential aversion to short-term losses could compel them to sell their investment and hold a zero risk investment instead if losses occur.
Defensive investors would possibly accept lower long-term return in exchange for smaller and less frequent changes in portfolio value. Analysing the risk-return choices available, a Defensive investor is usually willing to accept a lower return in order to assure the safety of his or her investment.
What this means is:If you hold the investment for over 3 years there is an 80% chance of getting a positive return.
The Cautious Investor
The Cautious investor may be sensitive to short-term losses. A Cautious investor’s potential aversion to losses could compel them to shift into a more stable investment if significant short-term losses occur. Analysing the risk-return choices available, a Cautious investor is usually willing to accept somewhat lower returns in order to assure greater safety of his or her investment.
What this means is:If you hold the investment for over 4 years there is an 80% chance of getting a positive return.
The Balanced Investor
The Balanced investor may be somewhat concerned with short-term losses and may shift to a more stable option in the event of significant losses. The safeties of investment and return are typically of equal importance to the Balanced investor.
What this means:If you hold the investment for over 5 years there is an 80% chance of getting a positive return.
The Capital Growth Investor
The Capital Growth investor may be willing to accept high risk and chance of loss in order to achieve higher returns on his or her investment. Significant losses over an extended period may prompt the Capital Growth Investor to shift to a less risky investment.
What this means:If you hold the investment between 6 and 9 years there is an 80% chance of getting a positive return.
The Aggressive Investor
The Aggressive investor usually aims to maximise long-term expected returns rather than to minimise possible short-term losses. An Aggressive investor values high returns relatively more and can tolerate both large and frequent fluctuations through time in portfolio value in exchange for a higher return over the long term.