Risk and Reward
The first thing to say is that there is no such thing as a "no-risk" investment, there are simply different degree's of risk with all investments.
The level of risk you are prepared to take with your money is one of the most important parts of putting together an investment strategy. There is no right or wrong choice of risk with investments; it is down to personal preference, but it should be linked very closely to your overall financial aims, as well as your current and desired financial situation.
An acceptable level of risk to you may be unacceptable to others, we avoid using subjective descriptions such as "Balanced" or "Cautious" as they will mean different things to different people. As a rule of thumb, the higher the potential returns the higher the risk. Your attitude to risk may (and should) change throughout your life, and as your circumstances change, and you should review your investment strategy as this happens.
There are five main types of risk with investments, these are:
- Market risk - the risk that market-linked investments lose value when markets fall;
- Interest rate risk - the risk that investments will lose value when interest rates change;
- Inflation risk - the risk that your investment will not keep pace with the cost of living;
- Credit risk - the risk that the provider may not be able to meet their obligations;
- Currency risk - the risk that your investment may be affected by changes in exchange rates.
The level of investment risk your money is subject to, increases if: you invest in a fund that only covers a single type of share; you invest in a fund that only covers a limited geographical area; or you invest in a fund that only covers a specific part of the economy.
We ask all our clients a number of specific questions regarding risk and reward before advising on where they should invest, the answers will then generate a computer based model of how much risk you are prepared to take. The model tells us how much of your investment should be invested in Cash, UK Fixed Interest, International Fixed Interest, Property, UK equities and International Equities.
We always advise keeping an adequate amount in easily accessible cash based accounts before advising on longer term investments.
Or, to put it all another way :
"Don’t put all your eggs in one basket"
"Always look a gift horse in the mouth"
"Keep something for a rainy day"
