A fully flexible way to invest
It isn’t possible to avoid all of the risks you’ll be exposing your money to over the course of your investing life, but there are ways you can reduce and manage them. Remember, however, that whatever you do to manage risk, you could still make a loss.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.
Before you begin to examine some of the market risks you could face – such as political, economic and currency risks – you have to think carefully about your own approach to risk.
There are three common types of investor:
Leaving your approach to risk to one side, there are other factors to consider when deciding where to invest. Your time horizon is important. If your investment goal is a long way in the future, you may be prepared to accept a higher level of risk, because if you suffer financial losses, you will have more time to recover your position. If you have a shorter time frame to invest over, you should be considering moving money into safer havens.
If your investments are providing your retirement income, you need to be careful that any falls in your portfolio value do not leave you unable to pay for your basic living expenses.
Once you’ve worked out the level of risk you are prepared to accept, you’ll be better placed to begin choosing a mix of investment types.
Risk management means making sure the investments you choose provide the right kind of balance.
Asset allocation – the best way to divide your investment money between various asset classes such as cash, bonds, and shares – is crucial when it comes to building any investment portfolio.
As each type of asset will perform differently at various points in time, making sure your asset allocation is diversified can help reduce overall volatility.
If, for example, you put all of your money into just one asset class, you are at much greater risk of losing significant amounts of your savings if something goes wrong, than if you have spread your investment money across several different asset classes.
Deviating from a diversified portfolio is not a good idea unless you know exactly what you are doing and why you are doing it.
Often purchasing one multi-asset class fund – that’s a fund that invests in a range of asset classes rather than just one – is easier than building a diversified portfolio from scratch. When you are considering a fund, look at the fund factsheet and key investor information document (KIID) to see its diversification across asset classes and its risk indicator, which ranges from one (lower risk/potentially lower reward) to seven (higher risk/potentially higher reward).
Diversification won’t wipe away all the risk attached to investments but it can reduce the chances of you losing all your money.
Investors should be on their guard against making any investment decision based solely on the past performance of a particular company or fund.
While it might be tempting to invest in a fund or company that has previously performed well, there are no guarantees that the same company or fund will go on to deliver such good returns again. The past performance of investments is not a reliable indicator of future returns.
You should research the asset class and sector of any investment you are considering making to see how similar it is to other investments you hold. Investing in a broad range of different investments across different asset classes and sectors will likely help you to achieve a better diversified portfolio. But it’s important to always keep in mind that no matter what steps you take to manage risk, your investments can still fall in value and you may get back less than you invest.
The value of investments can fall as well as rise. You may get back less than you invest.
A fully flexible way to invest
You need to decide how much risk you’re willing to take when you invest. This will largely depend on your financial goals, how prepared you are to accept losses, and how soon you need your money. In this section, we'll help you understand how to manage risk when investing.
If you’re new to investing, knowing where to start can be a daunting task. Here, we guide you through your investment journey, from what to consider before you start, the different types of investment account, which might suit you, and the various asset classes. You’ll also learn why it’s important to focus on the long-term as an investor, and create a diversified portfolio which includes a range of different investments.