Published on: 30th January 2020
It’s natural to want to protect your wealth by choosing less risky investment propositions. However, being overly cautious could actually end up meaning you don’t achieve better returns.
Whether you’re using an Individual Savings Account (ISA) to start investing for the first time or reviewing your pension investments, risk plays a significant role in the decisions you make. But are you taking too much or not enough? It’s common to hear warnings about taking too much risk and your investments losing value as a result. However, not taking enough risk can have a negative impact on finances too.
All investments come with some level of risk. However, this risk can vary significantly. What’s right for one investor, may not be right for another. So, it’s important to understand what the right level of risk is for you and your goals.
Being too cautious could cost you thousands of pounds
Research conducted by Aegon has highlighted how an overly cautious approach to investing can be as damaging as taking too much risk.
Analysis assessed how a £200,000 investment over a 20-year period would have fared with different investment strategies:
- A ‘cautious’ investor would have seen their savings grow to £449,068
- In contrast, an ‘adventurous’ investor would have seen their investment grow by an additional £93,058 to £542,126
Of course, the adventurous investor would have been exposed to more risk, which could have had a detrimental impact on their savings. But the findings highlight why it’s important to consider if your investment strategy has the right level of risk for you.
The stereotype of investors often shows them taking too much risk. But the research indicates that the opposite is likely to be true. In fact, after discussing investment risk and financial plans with a professional adviser, 34% of advised clients became less cautious. This compares to just 16% that reduced the amount of risk they were taking.
Nick Dixon, Investment Director at Aegon, said: “Risk tolerance varies greatly from one person to another and reflects a large number of factors including our personality, our knowledge of the subject, and even societal factors.
“What’s clear from our findings is that a significant portion of advised clients are excessively cautious when it comes to investing and that a conversation with an adviser shifts their views about how much risk they can afford to take. There are many benefits to financial advice, notably peace of mind that being advised by an expert provides, but it’s clear supporting individuals to take the right level of risk is one of them.”
5 things to keep in mind considering investment risk
If you’re weighing up how much investment risk to take, there are numerous factors to keep in mind. This can help ensure your investment decisions reflect you.
1. Investment time frame: How long do you intend to remain invested for? As a general rule, the longer you’ll be investing for the more risk you can afford to take. This is because it gives you more time to ride out the trough in investment markets and for values to recover. Taking a long-term view, investment markets deliver returns but there will be times that values fall. You shouldn’t invest your savings if you don’t plan to invest for at least five years.
2. Goals: Your goals should influence the financial decisions you make, including how much investment risk to take. If you’re investing to build up a retirement fund that will be your main source of income, you’ll be less inclined to take a higher level of risk than if the goal was to supplement existing pensions or saving accounts. Your goals should inform the decisions you make.
3. Mix of assets: Ensuring your wealth is diversified is important. As a result, you shouldn’t make investment decisions without looking at your wider financial position. In terms of investments alone, you should hold a mix of different assets to spread risk. When one asset is experiencing a dip, for example, a different asset can help balance this out. How your portfolio is weighted, will depend on your risk profile.
4. Capacity for loss: Could you afford to lose some of the money you’re investing? The more risk you take, the more likely this is to happen. As a result, those with a limited capacity for loss should note this when making investment decisions. However, no matter your goals, you shouldn’t invest money you can’t afford to lose. Investing, for instance, shouldn’t replace an emergency fund.
5. Your attitude: Finally, it’s crucial that you feel comfortable with the investment decisions you make. Your overall attitude to risk is an important part of the process. If you feel as though you’re not taking enough risk but aren’t confident in taking more, speaking to a financial adviser can help. By getting to grips with investment markets and understanding the long-term impact of investment decisions, you may feel more confident in raising your risk profile if it’s appropriate.
If you’d like to discuss your current investment portfolio and risk level, please contact us. Our goal is to give you confidence in your finances, including those relating to investments.
Please note: 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.