Your guide to risk & return
This is a transcript of the risk & return video.
We are constantly weighing up risks throughout our lives and investing is no different.
It’s similar to a downhill mountain biker: the rider is constantly making decisions about how much risk he is willing to take to get to his destination within his target time. The faster he goes, the more likely he is to achieve his time but he is also more likely to encounter a problem or veer off track.
However, if he decided to always ride slowly he might be more likely to stay on track but he would also have less chance of achieving his target time.
Similar to riding a bike, with investing, high levels of risk are associated with high potential returns. Low levels of risk are associated with low potential returns.
Whatever your investment objective, the greater the return you seek, the more risk you should be prepared and willing to take.
Keeping your savings in a bank is a low risk option but if interest rates are low, as they currently are, they may not grow in line with inflation.
If you wish to seek returns that are higher than inflation, you will need to invest in riskier assets. Investing in the stock market could make you more money than saving in a bank account. However, the value may go down as well as up, and you may get back less than you originally invested.
To manage your money effectively, we need to recommend an investment strategy that is based on your specific personal circumstances so we will need to identify, one: the level of risk that you are willing to take in order to help achieve your goals known as your ‘attitude to risk’ and two: the degree of loss to the value of your portfolio that you are able to tolerate without a material decline in your standard of living known as your ‘capacity for loss’.
To identify your attitude to risk and capacity for loss we have developed a questionnaire that determines which investment strategy is most suitable for you and whether Click & Invest meets your requirements. Based on the results of this questionnaire, we will recommend an investment portfolio.
For example, a low risk or ‘defensive’ strategy could look something like this (graph displayed in video) whereas a high risk or ‘aggressive’ strategy could look like this (graph displayed in video).
We invest in five major asset classes including cash, fixed interest, equities, commercial property and alternative investments.
Different asset classes carry different levels of risk and possibilities for return but your portfolio is designed to ensure that the concentration of risk is controlled or ‘diversified’ to make sure all your eggs aren’t in one basket.
Holding a broader spread of asset classes will reduce the overall risk of your portfolio as more will be invested in low risk assets such as cash and bonds. Higher risk portfolios will typically hold a greater exposure to equities.
All this means that when we set up and manage your portfolio, we go to great lengths to ensure we are selecting a suitable balance of investments in order to help achieve your objectives without exposing your portfolio to risks you are not comfortable with.