Investments: understanding the risks
Tue 31 Oct 2017
Nearly all investments have some form of risk - whilst you can’t completely remove this, you can manage it. Understanding risk and the levels you are willing to accept is a key concept of successful investing. Below is an overview of the things you need to know to get you started.
Investment risk - the basics
Put simply, investment risk is the possibility of losing some or even all of the money you have invested. Most investments carry an element of risk, the general rule is that the more risk that you take, the greater the potential return – but also the greater the potential losses. When you are thinking about investing, you should fully research where your money is going and the associated risks before making your final decision.
Types of risk
When investing, there are different types of risk that you need to consider, these include:
• Market risk: This is where stock markets fall causing losses which can negatively impact your investment. In order to give your investment the maximum chance to recover from market losses you should consider investing over at least a 5-year period.
• Capital risk: High investment gains are possible but these are usually linked with higher volatility, which in turn means you may not get back the capital you invest. Make sure you do not choose your investment purely on the level of possible returns and forget to balance this against the risk you are taking. Remember that the past performance of any investment is no guarantee of how it will perform in the future.
• Performance risk: The performance of funds will vary depending on the assets within them. Even if funds have similar objectives, there is no guarantee that they will produce the same results.
How to measure your attitude to risk
Everyone has their own attitude to risk and the limits they are willing to accept. There are a number of factors that can affect your ability to accept risk such as your income levels, age, health and your overall investment goals. To help assess your attitude to risk you should ask yourself some key questions:
1) Could you manage if your investments fell in value?
2) How would you feel if you did not meet your investment goals?
3) Are you happy to accept that your investment will fluctuate with the value going up and down over a period of time?
Remember it’s your money and you need to feel comfortable with any investment decision you take. You should re-assess your attitude to risk over time as your personal circumstances alter; what may not be acceptable when you have young children to support, you may be happier with once they have left home and are no longer dependent on you.
Easy steps to balance your investment risk
Diversification: One way of balancing the potential returns from your investment against the level of risk is to select an investment where your money is spread across different types of markets, sectors and assets. This is called diversification and means you are avoiding putting all of your investment eggs in one basket.
Invest regularly: You could consider an investment that allows regular savings. Most investments fall or rise over time so investing a regular amount over this period can reduce the overall risk by spreading the purchase of assets out over the ups and downs of the market.
Get professional help: If you are unsure how best to balance your risk levels against your investment goals think about contacting a financial adviser for help and support.
Police Mutual offer a range of savings and investments products. Whether you want to save regularly or invest a larger amount, our products could help meet your needs. To find out more about our range click here or call the team on 0345 88 22 999.
Type of article: Articles
Category: Saving my money
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