Some types of investments are inherently more risky than others. Factors to be considered should include:
- Length of time to hold investment
- Risk appetite
- Savings objectives
- Short term commitments
Any investment comes with a degree of risk. As a general principle, the more risk you take on, the more return you could potentially be rewarded with over the long term.
Different asset classes have different levels of risk and return attached. For example, gilts, otherwise known as UK government bonds, are considered a very safe investment because the government is unlikely to default either on the interest payments due, or the repayment of your capital at the agreed future date. In contrast, investment in equities (shares) is riskier. The likelihood of a fall in an individual share price is far greater than a fall in the price of gilts. The trade-off for this risk is that, on average, shares have historically provided higher returns than gilts over the long term.
One way of limiting risk in your portfolio is diversification. By spreading a portfolio over different types of assets (or within one asset class - for example a portfolio of different shares), you may achieve your desired level of risk and return.
In making decisions on risk, time is a key consideration. The more time you have until you require the money you have invested, the more risk you can assume in the expectation that long-term benefits will outweigh short to medium-term losses. For example, generally speaking the younger you are, the more you are able to invest aggressively (or take on more risk) as you have more time to weather the volatility associated with aggressive investment. As you get nearer to drawing your pension, it is likely that you would want to reduce the risk of your investments as you will now want to protect the gains you have accumulated.
In general, successful investment is about understanding why you are investing, over what time period, and ensuring the risk is appropriate to these circumstances.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested