Balancing investment risk and reward
Whilst most investments carry the risk that you may not get back the amount you invested, some types of investments carry more risk than others. The general rule of thumb is that the more risk you take, the greater the potential return - but also the greater the potential loss. The less risk you take will generally reduce potential losses but offer less potential returns. Please remember that the value of investments can go down as well as up and so there is always a risk that you may not get back the amount you put in.
Some key things to consider
• What is your attitude to risk - cautious, adventurous, or somewhere in between?
• How old are you? Your age may affect how you'd like to invest, particularly the closer you get to retirement.
• Have you thought about how much you can afford to lose? Again perhaps this may be influenced by your age as well as your investment needs.
Your age may affect how you'd like to invest.
• Playing it safe could carry its own risks. Leaving all your money in a building society, for example, may carry minimalbut you may miss out on the potential for better returns and, if your money doesn't grow over time, the effects of could see the spending power of your money fall.
• Are there any monthly or annual charges that could also eat into their value or any potential growth they could achieve?
A balancing act
One way of balancing potential rewards whilst limiting investment risk is to spread your money across different types of investment. This is called diversification and is a key investment concept meaning you avoid putting all your eggs in one basket.
How do I understand investment risk?
Trying to understand and decide on the level of risk you are willing to take with your investment can be a difficult task. Understanding some of the risks that an investment could be exposed to could help you assess how much risk you are willing to take. Growth from your investment cannot be achieved without exposure to some risk.
Some investment funds are more risky than others so how do you decide which investments are most appropriate for you based on how much risk you are willing to take with your money.
The table opposite helps illustrate the general rule of thumb that, the more risk you take, the greater the potential for returns, but so too is the greater potential for loss.
We are not recommending one option over another or providing advice.