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 help you understand our risk levels: https://www.wealthify.com/blog/a-quick-guide-to-investment-risk-styles.
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.
Review your 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.
Consider your time frame
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 typically, the longer you invest, the more risk you could choose to take. 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 ways to mitigate your investment risks and minimise potential losses.
Diversify your plan
A good way to shelter your plan’s value from going to zero is to diversify. If you invest all your money in one or two companies, you’d be taking more risk. Think about it. If these companies struggle, you could lose everything. Now if you diversify by spreading your money across investments types and regions, the risk of losing everything decreases, since poorly performing investments should be balanced out by others doing well.
At Wealthify, there are five investment styles, and whether you’re Cautious, Adventurous, or somewhere in between, our Investment team will build you a diversified portfolio with the right mix of investments. What does it mean, you ask? Well, based on your risk level, our Investment team will invest your money in a number of financial markets and funds (hampers full of different assets, like shares, bonds, and property). The mix of investments held into your portfolio may change over time, but our experts will always make sure your plan is on track with your investment style.
Think about the long-term
In addition to diversifying your plan, make sure you think about the long-term. Obviously, seeing markets fall can be stressful, but it’s part and parcel of being an investor, and if you want to ride out the bumps and minimise potential losses, it’s important to look at the bigger picture. If you react and sell your investments when markets are down, you’ll be making your losses real. So, try not to react and think long-term. Doing nothing may feel a bit counter-intuitive, but remaining invested for a number of years, regardless of market movements, tends to pay off. 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 between 1986 and 2019, 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, and the Global Financial Crisis of 20081.
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.