Investments

Why risk isn't necessarily a bad thing when it comes to investing

MoneyPlus Features Team

Whether you’re investing with a specific goal in mind, or simply saving for retirement, it’s important to understand risk – the impact it has on investments, how comfortable you are with it and how you can manage it.

For many people, investment risk means the chance of losing money. But that’s not the whole story. It’s actually inseparable from investment returns, which means that taking some risk with your investments also gives you the chance of growing the value of your money over the long term.
So if you’re only prepared to take a very low level of risk, the returns you could get will almost certainly be low, possibly even negative in real terms once you take inflation into account. If you’re prepared to take some more risk with your money, the potential long-term rewards, or returns, may be higher.

The risk/return trade-off

All investments carry some risk. But some are riskier than others, and for taking on that extra risk, they offer the potential for higher returns. Equally though, there’s the potential for greater losses - this is the risk/return trade-off.
The chart below shows where the main types of investments (asset classes) sit on the risk/return spectrum – in other words how much risk they can take versus the level of returns you can generally expect. Although past performance should never be a guide to future returns, this is how they’ve tended to perform historically.
Risk and return infographic
To find out more about different types of investments, read our guide on where to invest.

The difference between investment risk and volatility

All investments can go down as well as up in value, and sometimes this movement in value can be significant. This is known as volatility, and it’s important to understand the difference between volatility and risk.
Volatility is the amount that investments, for example shares, go up and down. So, although it can be true that the more risk you take with your investments, the more likely you are to experience significant ups and downs, it doesn’t necessarily mean you’re more likely to lose money over the long term.
It’s natural to feel worried when you see your investments fall during periods of market volatility, particularly when there are periods of significant losses as we saw earlier this year at the start of the pandemic. But the key is try not to worry. Market ups and downs are a part of investing and history has shown us that markets usually recover from short-term losses in the long run.
Time can make all the difference – that’s why, where possible, it’s often a good idea to take a long-term view and hold on to your investments through periods of market volatility.

How much risk should you take?

How much risk you’re comfortable taking with your investments will generally depend on what’s known as your attitude to risk, and this is a very personal thing. What’s risky to one person may not be to another. And bear in mind that how much risk you’re comfortable taking can change as you go through life.
Our risk questionnaire can help you identify how much risk you may be comfortable taking with your investments . You should also consider some of the following questions when deciding how much risk to take:
• What are you investing for? Do you have a target you want to reach with your investments?
• How long are you investing for? When will you need the money? For example, if you’re saving for a long-term goal like retirement, you might be comfortable taking a higher level of risk when your retirement date is still a long way off
• How much money could you afford to lose? This is sometimes called your ‘capacity for loss’
• How much risk do you actually need to take? It’s a good idea to be realistic about this. If your target is fairly low, you may be able to take less risk. But equally, if it’s fairly high, you might have to be prepared to take on a significant amount of risk – and more than you’re actually comfortable taking
• Is investing right for you? If you’re not comfortable accepting any risk at all, then you might want to consider putting your money into a savings account instead

Some tips to help reduce risk and meet your investment goals

Although you can’t eliminate risk completely when you invest, you can manage it to help you meet your goals.

1. Diversify your investments

As we’ve already mentioned, different types of investments have different levels of risk. So one way to manage this is by spreading your money across a number of different investment types and countries – called diversification. Different asset types react differently to events in the markets, so by doing this, the overall value of your investments should be less likely to change significantly than if you were invested in a single type of investment or location.
If you’re in a workplace pension plan, it’s likely that your investments will already be well diversified. And most pension plans and stocks & shares ISAs will offer ready-made diversified investment options run by professional fund managers. You’ll benefit from their expertise and ability to access a wider range of investments than those available to most individual investors.

2. Consider moving into lower risk investments

As you get closer to your goal’s end point, for example when you’re approaching retirement, think about moving into lower risk investments which are less likely to experience large short-term falls.
Again, if you’re in a workplace pension plan, you may already be in an investment option that automatically does this for you – called a lifestyle profile.

3. Invest for as long as you can

The longer you’re invested for, the more time your investments have to recover from any short-term losses. Read more about this here.

4. Regularly review your investments

It’s a good idea to keep an eye on your investments to make sure the level of risk you’re taking is still right for you and your goals. If you have a Standard Life plan, you can do this easily by logging in. You’ll be able to check where you’re invested, including information about how much risk your investments are taking. And you can make changes to your investments if you wish.

5. Get financial advice

Not sure whether you’re taking the right amount of risk with your investments? If that’s the case, then consider getting professional financial advice before making any decisions. If you don’t have an adviser, you can find one in your area at www.unbiased.co.uk. There’s usually a charge for getting advice.
To find out more about investment risk, you can also read our guide.
The value of investments can go down as well as up, and may be worth less than was paid in.
The information here is based on our understanding in October 2020 and shouldn’t be taken as financial advice.