Understanding risk

We’d all like our money to grow without risk. Unfortunately, this isn’t possible. Every investment decision involves some degree of risk.

Not investing involves risk – by doing nothing you run the risk of never achieving your financial goals.

There are ways of dealing with risk. First, you need to be aware of your attitude to risk, your capacity to take risk and how to manage risk.

The following information is for general guidance only. Speak to your financial adviser about your attitude to risk and how to manage it.

How much risk should I take?

This depends on your financial circumstances and goals. The extent to which you are prepared – or can afford – to risk losing money is one of the key considerations you make when you choose where to invest your money.

Your attitude to risk will depend on -

  • your financial circumstances and goals 
  • the extent to which you are prepared or can afford to lose money 
  • the length of time you are prepared to invest for.

Cautious investors tend to look for more stable returns and accept the amount they are likely to gain will be limited as a result. On the other hand, more adventurous investors, seeking higher returns, understand their investment is likely to go sharply up and down in value.

What are the risks?

Your plan will have it's own product risks. Your key features document will explain these.

It’s important to know about what could happen to your money when you invest it. Here’s some information on several different risks you should be aware of -

  • Investments can fall in value – Investments generally go up and down in value, some types more than others, for example, equities. There is a risk that you may not get back as much as you put into your plan. 
  • Your income – If you are taking an income from your fund, the income may be less than you had expected. 
  • Inflation – Your investment may not keep up with inflation reducing your future buying power. 
  • Currency risk - Currencies – for example sterling, euros, dollars and yen – move in relation to one another. If you are putting your money into investments in another currency then their value will move up and down in line with currency changes as well as the normal share-price movements.
  • Accessing your money – It isn’t always possible to cash in your investments quickly. For example if you invest your payment in a property fund there may be a long delay (up to 12 months) in cashing in your investment. 
  • Fund – The funds you choose to invest in all have risks. Further details can be found on the relevant fund factsheet.

Will my attitude to risk change?

As your circumstances change over the years, it’s likely that your investment goals will also change, affecting your attitude to risk.

For example, if you start your plan at the age of twenty, you may be happy to accept a higher level of risk as you are expecting to invest over the long term (10 years or more).

On the other hand, if you’re coming up for retirement you may want to try to protect the value of your investments from falling by choosing a lower level of risk.