Understanding investment risk

Understanding investment risk

All investments carry some kind of risk – but it’s risk with the aim of growing the value of your money. So it isn’t necessarily a bad thing. It’s just important that you’re aware of, and comfortable with, the types of risks that come with investing.

It’s also important to understand how much risk you’re comfortable taking – otherwise known as your attitude to risk – as well as how much risk you’re able to take with your money – otherwise known as your capacity for loss.

This can help you make an informed decision about where best to invest to meet your goals. It will also help when you review your investments. This is because how much risk you’re comfortable and able to take can change as you move through life and your financial goals change.

Reduce the risk of not meeting your goals

As we’ve already mentioned, how much risk you take with your investments can really have an impact on how much they could grow over the long term, and whether you’ll meet your financial goals.

Sometimes people don’t take the right level of risk to achieve these goals. Taking too much risk might mean you experience sudden and significant falls at the point when you need to take money – for example, when you’re starting to take money from your pension savings.

On the other hand, very low risk investments may not grow enough to keep up with inflation, so won’t grow in value in real terms.

To help make sure you meet your goals, here are some things you can do:

• Diversify your investments – learn more about diversification on our dedicated page
• Think about having at least some of your money in investments which have the potential for higher returns over time – take a look at our guide on the different types of asset classes to learn more
• Invest for longer – the longer you’re invested for, the more time your investments have to recover from any short-term losses
• As you get closer to your goal’s end point, consider moving into lower risk investments which are less likely to experience large short-term falls

Other risks to be aware of

As well as the general investment risks you need to think about, different types of investments have their own specific risks. You can find out more about these here.

And, while it’s a good idea to spread your investments across a range of countries, as well as different types of investments, investing in other countries does have some additional risks. For example, movements in currency exchange rates may have an impact on the returns you get from overseas investments.

Understanding your attitude to risk

We have a questionnaire, developed by independent company Oxford Risk, that can help you understand how much risk you’re comfortable taking with your investments.

Take the questionnaire

Picking investment options to match your attitude to risk

Most investment options have some kind of risk rating to give you an indication how much risk they take. You can usually find details of these ratings in factsheets and investment guides.

We also offer a range of easy investment options for our pension and Stocks & Shares ISA products which let you choose the level of risk that’s right for you – from 1 lower risk, to 5 higher risk. A team at Aberdeen Standard Investments will then manage your money with the aim of getting the best possible returns for that level of risk.