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Understanding your attitude to risk

Manage your investments

If you're planning to invest, you need to know whether you are prepared to risk a large, medium or a very small proportion of your money to invest. How much risk are you willing to take?

Read on to find out more.

You should ensure that you only invest what you can afford to lose and have savings to cover any short to medium term needs. It is commonly accepted you should look to hold at least three months' income in a savings account that offers immediate access in case of an unforeseen emergency. You should also think about making full use of your annual tax allowances, eg ISA allowances, when investing.

You need to understand your attitude to risk – which can be determined by your circumstances, age, goals and other factors – as this will help you decide what type of investments you make.

A general rule is that the more risk you’re prepared to take, the higher the potential returns could be. The downside is that any losses are potentially greater. If you want more security – in other words you want to take a more cautious approach – your returns are likely to be lower albeit more consistent.

Of course there will be people who are unwilling to take any risk with their money. If that’s you, you’re better off putting your cash into savings. But you should be aware that inflation can eat into the value of your money. Look at it like this: if inflation is 3% and your savings interest is 1%, that means in a few years' time your money will buy less than it does now. The opposite can happen, of course, where interest rates are higher than inflation – and that works in your favour. That said, investing your money will not necessarily secure you a 'real' return after inflation either.

Think about risk in two ways:

  • Your ability or capacity to take risk. This is all about your financial circumstances and goals. If you have more wealth and can invest over longer periods, you may be more able to accept a higher degree of risk.
  • Your attitude or willingness. This is more of a mental approach. Some people may not be able to sleep at night at the thought that their investment can fall in value rather than rise.

The risk profiles below may help you identify what sort of investor you are.
 

No risk

  • Preserving your capital is the most important factor when you consider your savings. This means that you are more likely to restrict your savings (for growth or income needs) to cash deposits, cash ISAs, interest bearing savings accounts and similar products that also offer ready access to your money and are covered under a depositor protection scheme.
  • You understand the effects of inflation on your capital (and any interest received) and how this can reduce the real value of your money over time.
  • See our range of savings accounts

Low risk

  • The opportunity to achieve reasonable returns (for growth or income needs) is important to you but you wish to invest in a way that aims to preserve more of your capital if markets fall. You may have little or no experience in taking investment risks but accept this may be necessary to achieve returns potentially equivalent to or higher than those available from cash deposits. You understand that this could involve your capital being invested for five years or more with low to medium exposure to stocks and shares and other more riskier investments. 
  • You understand that the value of any investments you make will fluctuate and you might get back less (or more) than you invested (at maturity or earlier).

Medium risk

  • The opportunity to achieve attractive returns (for growth or income needs) is very important to you but you also want to invest in a way that does not expose all of your capital to more riskier investments. You have some experience in taking investment risks and accept this is necessary to achieve potential returns much higher than those available from cash deposits. You understand that this could involve your capital being invested for five years or more with medium to medium high exposure to stocks and shares and other more riskier investments.
  • You understand that the value of any investments you make will fluctuate and you might get back less (or more) than you invested (at maturity or earlier).

High risk

  • You are an experienced investor and are prepared to take on very high levels of investment risk that offer the potential to achieve exceptional returns. This opportunity to achieve exceptional returns (for growth or income needs) is a key priority for you – even in circumstances where it might pose a significant risk to some or all of your underlying capital. You understand that a high-risk investment could involve your capital being invested for five years or more with maximum (up to 100%) exposure to stocks and shares and other more riskier investments. 
  • You understand that the value of any investments you make will fluctuate and you might get back much less (or much more) than you invested (at maturity or earlier).
     

Other important considerations
Understanding your attitude to risk (ATR) is just one of many important considerations when deciding whether to invest, and how much risk to take. We have outlined a few of these considerations below:

Ability to bear losses – what can you afford to lose if things go wrong?

Your personal circumstances will affect how much you can afford to lose and, therefore, how much risk you should take with a particular investment. For example:

  • Whether you have an adequate emergency fund. You should ensure that you only invest what you can afford to lose and have savings to cover any short to medium term needs. It is commonly accepted you should look to hold at least three months' income in a savings account that offers immediate access, in case of an unforeseen emergency.
  • Your investment time horizon. Generally speaking, the longer you can leave the money without needing to access it, the more adventurous you can afford to be risk-wise.
  • The impact of your age/health on your investment time horizon. For example, carefully consider these when looking at any fixed term product – you want to be around to enjoy any benefits when it matures!
  • If you were to lose a significant amount of money though a poorly performing investment, do you have enough income and time available to recover the impact on your financial position?
  • Whether you have a particular investment target to meet. For example, if you need to pay off a mortgage or cover the cost of school/higher education fees.
  • Where did the money for this particular investment come from? For example, you may be able to afford to take more risk with an unexpected windfall that is ‘surplus to requirements’ as far as your financial security is concerned.
  • How much of your total portfolio does this particular investment represent? And is the rest of your portfolio held in relatively high or low risk investments?

Your other financial planning needs – should investing be your priority?

  • Do you have outstanding debts on credit cards or loans? It is usually best to use any surplus money to clear debts before using it to invest – and you should certainly avoid borrowing money to fund your investments.
  • Do you have adequate family protection (for example to cover the financial impact on your family of you being unable to work due to ill health or death)? Depending on your circumstances, this may well be a higher priority than investing.
  • If you have a relatively large mortgage to service, it may be better to use any surplus money you have to reduce the amount you owe, rather than investing it.

If you need help with deciding how your personal circumstances should affect your approach to investing, you should seek professional advice from an independent financial adviser.

What are the main types of risk associated with investments?

  • Capital security – the risk that the value of the money you have invested will fall, instead of rise.
  • Shortfall risk – the risk that your investment won’t perform well enough to meet a particular target (eg, to pay for school fees or repay a mortgage).
  • Interest rate risk – the risk that you commit to a product paying a fixed return over a fixed period, and interest rates move against you during that period.
  • Inflation risk – the risk that the growth you achieve on the money you invest will be outweighed by inflation, so its purchasing power will diminish over time.
  • Income risk – the risk that your investment won't perform well enough to generate the income you need (or that the amount of income you take exceeds the growth generated by the money you invested – so your capital shrinks over time).

What's my next move?

  • If you’re comfortable making your own investment decisions without the help of a financial adviser, you can view our range of investment products, read our brochures and apply online from just £3,000.
  • If you would like assistance or are an existing Barclays customer and would like to make an application by telephone, please call 0800 445443 1.
  • Remember: if you are unsure if an investment is right for you, please seek independent financial advice.

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