Ultimately, when it comes to risk - everyone is different and the best person to establish the level of risk you’re prepared to accept, is you.
Once you’ve decided how comfortable you are with risk and your blend of assets is in line with your goals it’s all about letting time do the work so try not to focus on short-term market ups and downs but on the long-term potential of your investments. Your attitude to risk is likely to change over time so ensure you consider your circumstances and long-term goals in deciding how much risk to take.
If you’re still a way off retirement, you may prefer to invest in higher risk assets, that aim for higher potential returns, as your portfolio has more time to recover from any fall in value. Diversification of your portfolio may help manage this risk. That said, it is important to understand that even with a long-term timeframe, there is a chance you may get back less than you invest.
As you get closer to retiring, you may decide the situation has changed. At this point, there may not be time for your savings to recover from any fall in value. Moving your money into lower‑risk investments might help reduce this risk.
Choosing an investment strategy
A basic investment strategy can help you plan and decide where to invest. Remember you don’t have to stick to the same strategy throughout your lifetime. In fact, it’s a good idea to regularly assess your investment needs and savings goals and re-align those with your overall investing plans.
A growth strategy
A growth strategy focuses on investments that have a higher chance of producing greater returns over the long-term. These higher returns will also involve more risk, and the value of your portfolio may fall. The key is to try and ensure that your investments have time to recover from any setbacks, so they can potentially go on to grow in the future.
Time is the key to a growth strategy. It may suit investors who still have many years to go before they retire. If you are considering adopting a growth strategy, you should be comfortable with the higher level of risk associated with achieving higher returns in the longer term.
A balanced strategy
A balanced strategy aims to achieve a balance between investments that offer high growth potential, with a relatively high level of risk, and those that offer more security. The idea is to provide some protection for the money that has already built up within a portfolio, while ensuring there is still the potential for some growth in the years before you retire.
While not as risky as a growth strategy, there is still some risk involved. Investors can achieve this balance by combining different types of funds or by simply focusing on investment funds that offer a medium level of risk and growth potential.
A balanced approach may suit investors who are approaching retirement, or are only prepared to accept a limited amount of investment risk.
A conservative strategy
A conservative strategy focuses on lower‑risk funds so there is less chance of your portfolio suffering any short‑term losses. The types of investments to consider include cash deposits and the more secure types of bonds. By moving away from share-based funds, you can help protect your investments from the danger of a sudden drop in the stock market.
The drawback with this approach is that the potential returns from conservative investments tend to be lower than higher risk options.
A conservative strategy may suit investors who are relatively close to achieving their investment goal. It’s important to remember that even if the investment risks are relatively low, there is still a risk of inflation eating into the value of your savings, if they aren’t growing enough. Following a conservative strategy when you still have many years before you can retire may mean your portfolio won’t grow as much as you need it to.
There are different ways funds can be managed - actively, passively, or as a combination of both, known as ‘blended’.
Passively managed funds, try to match the average performance of a stock market. There is no need for company analysis and the day-to-day decisions about which shares to buy and sell, as the fund will aim to hold the same proportion of shares that make up the market it’s tracking.
This means the charges on passive funds tend to be lower. Passive funds aim to match the market’s performance, not beat it. Choosing a passively managed fund means you’d rather not pay extra for the expertise of an active fund manager.
For example, a passive fund that aims to track the FTSE All-Share Index (based on the top 100 companies listed on the London Stock Exchange) will hold a variety of shares reflecting the composition of the UK stock market.
Actively managed funds aim to produce above average performance. They’re run by expert fund managers, who are responsible for choosing which investments to buy and sell. Each manager may have to keep within certain criteria, but within these, they can exercise their own judgement over which investments to hold.
The management charges of active funds tend to be higher than those of passive funds, as they have to cover the costs of things like research. By choosing an actively managed fund you’re paying a premium for the fund manager’s expertise and resources.
For example, in the case of an active fund, the manager may hold a subset of funds in the index according to what he feels is appropriate.
At times funds employ elements of both passive and active management. For example a fund manager may actively choose which asset class to invest in across a range of different assets but would use passive investment strategies within those asset classes. Often these funds are multi-asset or diversified funds which invest in a range of asset classes such as equities, bonds, cash, property and commodities.
The value of investments can go down as well as up, so you may get back less than you invest.