When looking into investing it is crucial to know your tolerance to risk. That way you can ensure your investments are put into the risk portfolio right for you. Here we discuss the steps you should consider when deciding your risk appetite:
Know what you can afford to lose
Ask yourself what would happen if you lost some or all of the money you’re putting into investments. This will depend on your circumstances and how much of your money you’re investing. Think about people who depend on you financially and any other important financial commitments you need to be sure of meeting.
Work out your goals and timings
Your saving and investing choices will depend on your goals and timescales. The bigger your goal in relation to the assets or income you wish to invest, the greater the rate of return required to beat inflation and hit your goal. Taking no volatility risk at all may make your goals impossible to achieve; taking too much may lose you your investment.
Short-term goals are best saved for in cash.
If you have a short-term goal, one you expect to happen in under 5 years, such as being able to buy a car or saving for a house deposit, your appetite for volatility risk would usually be low. This means that cash products will be the best place to invest. You don’t want to be worrying about the state of the financial markets when you need your money to be readily accessible. However, cash savings run the risk of not keeping up with rising prices (inflation risk).
Inflation-beating returns with longer-term goals
It’s more common to put your money into investments that have a better chance of giving you inflation-beating returns, such as shares, but which carry the risk of prices going down.
A longer time frame gives your investment more time to recover if it falls in value. Therefore, if you have a long-term goal, it makes sense to be prepared to take on volatility risk for the opportunity of higher returns. However, as a long-term goal moves closer, the risk balance should change.
For example, you may want to start moving into less volatile assets a few years before the goal date, to start ‘locking-in’ gains, and to protect your investment against events like market falls. At any one time, you may have a mixture of short-term or critical goals.
During the autumn we are running a series of presentations that will go into more detail about protecting your investments against risk. If you would like more information please call us on 0808 168 5866