Investing comes with risk. It’s undeniable. But it’s not all black or white, and you don’t have to comply with a high-risk approach if you’re the cautious type. As an investor, you have the power to choose your risk level. But before making a choice, it’s important to determine how much risk you’re willing to take. Here are some nifty tips to help you do just that.
How to choose the right amount of investment risk
If you’re looking to enter the investment world, make sure you consider your risk appetite. Here’s a quick guide to our risk levels and some things you might want to think about below.
What is your attitude to risk?
Here, it’s all down to your personality. Do you like to live dangerously? Or do you prefer safety? There’s no right or wrong answer – after all, we’re all different, and that’s fine. But your answers will help you choose the right amount of risk. It could be a good idea to choose the risk level that’ll give you some peace of mind and help you reach your financial goals in the time frame you’ve chosen.
What's your current financial situation?
With investing, returns aren’t guaranteed, and there’s a chance you could end up with less than you initially put in. Of course, there’s a chance you could end up with higher returns over the long-term, but it’s always a good idea to think about the worst-case scenario. So, ask yourself the following question: ‘how much money can I afford to lose?’. The answer will likely depend on your financial situation and personal circumstances.
How long do you plan to invest for?
The other thing you could do to gauge your risk appetite is consider your time frame. How long are you planning on staying invested for? Answering this question will help you choose the risk level that suits you. But of course, you’ll need to consider your financial situation and your attitude to risk before making any decision.
How to mitigate risk
Regardless of where you stand on the risk spectrum, there are some ways you could help to mitigate your investment risk and potentially minimise potential losses, such as diversifying what you invest in and thinking about the long-term. After all, the longer you invest for, the more time you could give yourself to recover from market downturns (which are common when investing).
We go into more detail into both of these strategies below.
Diversify your plan
You know that saying, 'don't put all your eggs in one basket'? Well, it's something you could also apply to investing through a process called 'diversification'.
When investing, diversification involves spreading your money across a range of different investment types and regions – meaning that you're not relying on one asset, company, global market, or fund (which are hampers full of different assets, like shares, bonds and property) to perform well. Instead, you could be giving any poorly performing investments the opportunity to be balanced out by others doing well (though, of course, this can't be guaranteed).
At Wealthify, we have five investment styles to choose from when you invest with us. So, whether you’re Cautious, Adventurous, or somewhere in between, our investment team will build you a fully diversified portfolio with the right mix of investments to suit your attitude to risk. Put simply, this means that based on your risk level, our investment experts will invest your money in a number of financial markets and funds.
The mix of investments held into your portfolio may change over time depending on market trends and conditions, but our experts will frequently access your plan to help keep it on track with your investment style.
General Investment Account GIAs are a simple way to invest and could be a great option if you've used up your annual ISA allowance as there's no limit to how much you can put in!
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Think about the long-term
In addition to diversifying your plan, it could be useful to think about the long-term when you invest.
Obviously, seeing markets fall can be stressful, but it’s part and parcel of being an investor. If you want to give yourself a potential opportunity to ride out the bumps that it's normal to experience along the way, then you might find it helpful to sit back, stay calm and look at the bigger picture rather than reacting in the heat of the moment.
Just thinking about it this way. If you react and sell your investments when markets are down, you’ll be cementing your losses and making them real.
And while doing nothing may feel a bit counter-intuitive, remaining invested for a number of years, regardless of market movements, could pay off in the end. Indeed, according to many studies, the longer you remain invested, the more likely you are to make a gain. For example, if you had invested in the FTSE 100 for any 10-year period since 1984 until now, you would have had an 89% chance of making a positive return – and this is a time period that includes many market crashes, like Black Monday, the Dotcom Bubble, the Global Financial Crisis of 2008, and of course, the various dips caused by the Coronavirus pandemic1.
If you have any question about investment risk or your investment style, please feel free to contact our Customer Care team.
1: Data from Bloomberg
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not offer financial advice. Please seek financial advice if you're unsure about investing.