September 23, 2022
Taking too much risk is most people's main concern when starting out in investments. You’ve likely heard stories of people investing in high-risk opportunities and suffering losses. Yet when you’re investing for the long term, taking too little risk can also be damaging.
As inflation remains high, considering how you’ll get the most out of your money is more important than ever. Yes, interest rates are rising but they still remain far below inflation, which was 10.1% in the 12 months to July 2022. As a result, money held in a cash account is likely to be falling in value in real terms. So, you may be wondering if investing could provide you with a way to maintain or grow the value of your assets.
One important thing to consider is: how much investment risk should you take?
All investments carry some risk. Yet investment opportunities can have very different risk levels. So, it’s vital you understand what risk you’re taking and whether it’s appropriate for you.
It’s natural to feel risk-averse when you’re making decisions - no one wants the value of their assets to fall. You may also worry about what would happen if you lost the wealth invested. Yet if you’re taking too little risk, it could mean your money isn’t working as hard as it could be.
As a general rule, the more risk you take, the higher the potential returns. So, taking an appropriate amount of risk could help you grow your wealth and reach your goals. While markets experience volatility, they tend to recover, although there is no guarantee. Taking a long-term view of your investments and the risk taken can reduce worries that you may have.
There are steps you can take to give you confidence when investing too. For example, you should have an emergency fund that you can fall back on. This could provide a valuable safety net if the value of your investments fell.
That’s not to say you should take a high level of risk for the chance of securing higher returns – it’s about balance. There are several factors you should consider when reviewing your investment risk profile. Our investment advice can help you consider all options.
A risk profile can help you understand what level of risk you should take. Within your investment portfolio, you’re likely to have investments with different levels of risk. However, overall you should align your portfolio with your profile. Here are four key things you should consider when creating a risk profile.
You should always invest with at least a five-year time frame. This provides time for the peaks and troughs of the investment market to smooth out. If you can invest long-term you tend to see better returns. Of course, there are many situations where you’ll be investing for much longer. You may be investing for your retirement over several decades, for example. A rule of thumb is that the longer you invest, the more risk you can afford to take. So, it’s important to set out an investment time frame from the outset.
What are your reasons for investing? Your response could change what investment risk is appropriate for you. Let's say you have a defined benefit (DB) pension that will provide you with a comfortable retirement. You want to invest so you can have more luxury experiences, such as long-haul holidays. Here, you are in a better position to take more investment risk compared to someone investing to generate a basic retirement income.
You shouldn’t make investment decisions without looking at your wider financial circumstances. If you’re in a secure financial position, you may be able to take a greater amount of risk. this is because volatility is less likely to affect your lifestyle.
Best practice would mean you have an emergency fund in place before you invest. You can also consider things like financial protection, to secure your financial future.
Finally, it’s important you feel comfortable and confident about the steps you’re taking. This is where your attitude to risk comes in.
Proper investment advice from a professional can put your mind at ease. Once you understand how investing could fit into your portfolio, it may be something you decide to move forward with, or you may consider alternatives.
It can be difficult to understand how much investment risk is appropriate for you, so we’re here to help. Maybe you don’t know where to start, or you’d like a professional to review your existing portfolio. One of our financial planners will be happy to discuss your options.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.