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What’s your attitude to risk?

When it comes to your investments, it's important to work out how you really feel about risk and how much you're willing to accept.

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.

What you’ll learn:

  • Why your approach to risk matters.
  • How your investment time frame relates to risk.
  • Why you need to establish how much money you can afford to lose.

The level of risk you’re prepared to take with your money is partly down to what you’re like as a person, whether you’re a natural risk-taker or if you tend to be more cautious.

Some people are ‘risk-averse’ meaning they’d rather put their money into safer investments, even if that means less chance of making big returns. Others are comfortable accepting a greater level of risk for the chance of higher potential rewards.

There’s more to it than that, though. How much risk you decide to take also depends on your investment goals and how much time you have, or want to take, to achieve them.

Deciding on how long you’re investing for

If you’re investing for just a few years, perhaps in the run up to retirement or to fund education costs, you may decide to adopt a more cautious approach to your investments, because if things go wrong you will have less time to recover any losses.

If you’re leaving your money invested for many years - usually a decade or longer - and you won’t need access to it, you may be prepared to accept a higher level of risk. While it’s not always the case that your investments will do better over the long term, by taking more time it will mean your money has more time to recover from any downturns. In addition the longer you stay invested the more you are likely to benefit from the impact of compounding, where as you continue to invest more money, the returns you make should rise in value.

What could you stand to lose?

Thinking about what you could afford to lose might be uncomfortable but it’s an essential part of working out your attitude to risk. It’s worth considering what the impact on your financial situation would be if your investments fell by different amounts and whether you could survive without any problems.

Things to think about

There’s no right or wrong attitude to risk. Your risk profile is personal to you and is based on circumstances, your goals and ultimately, the type of person you are. Once you’ve worked out your approach, you can start building a portfolio that reflects your risk profile. Remember that all investments carry risk and there’s always the possibility that you could lose money or get back less than you invest. If you’re not sure what your attitude to risk is and you feel you need help, you may want to think about getting independent financial advice. You’ll have to pay for any advice you get, but it may help you decide what level of risk is right for you.

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