Risk varies with every individual. A personal risk profile impacts primarily on the investment choices made, but is also driven by individual circumstances and needs.
An individual needs to balance their attitude to risk with their desire for positive returns. All investments carry some degree of risk. Once you understand your attitude to risk you can better achieve the most suitable investment mix for your needs.
The information set out herein is not advice; it is designed to enable you to formulate your own investment decisions. If you are unsure of the suitability of any investment, you should contact a Financial Adviser.
There are two aspects to Investment Risk, the risk that investments will fall in value and the risk that investments will not grow sufficiently to meet investment objectives. It must be accepted that the value of investments can go down as well as up, and yields may vary so any income is variable and cannot be guaranteed.
As well as investment risk, there are other risks that can impact returns, and potentially your attitude to risk. Examples are:
- Taxation rules can change and may affect performance
- Interest rates
- War, Terrorist Acts and Natural Disasters
- Changes in personal circumstances necessitating forced redemption of investments
- Currency Rates of Exchange
Your Attitude to Risk
There are two aspects to consider.
Are you able to take risks? Do you have sufficient funds to meet your day to day needs and meet any emergency requirements? Generally a wealthy investor who can invest over longer periods may be more able to accept a higher degree of risk.
Are you willing to take risks? Will you be content should investments fall in value, or will this make you uncomfortable and unwilling to continue investing?
Set out below are distinct risk profiles. Previous experience has indicated that all investments, no matter which profile they fit, can be subject to price and return volatility.
The investment is expected to be secure over the anticipated holding period. Loss of capital is very unlikely, e.g. the default of a major bank, but the returns are likely to be low and, over a period of time, there is the risk that the investment value can be eroded by inflation. This equates to SRRI value 1.
- National Savings
- Bank and Building Society Accounts
Positive returns are not guaranteed, although the chances of this are lower than at higher risk profiles. Returns may be slightly better than bank or building society savings accounts. These investments should produce a steadier but lower return which may limit the potential for the investment to grow and/or maintain its spending power. This equates to SRRI values 2 and 3.
- Money Market Funds
- Absolute Return Funds
- Corporate Bond Funds
- Gilt Funds
- Cautious Managed Funds
Investments offer some regular fluctuations in value in exchange for the opportunity to achieve above average investment returns. Investment losses are possible. The risk profile may be affected by the individual fund manager’s strategy. This equates to SRRI value 4.
- Equity and Bond Income
- Balanced Managed
- Active Managed
- Equity Income and Growth
Investments offer higher returns and volatility, and could be subject to large fluctuations in value with a greater potential for gains and losses. This equates to SRRI value 5 and 6.
- UK Equity income
- North America
- Global growth
- UK All Companies
Investments offer higher returns with the very real possibility that higher losses may arise. Investors need to be comfortable with significant short term fluctuations and be aware that returns are unpredictable. This equates to SRRI value 7.
- Japanese Smaller Companies
- Technology & Telecoms
- North American Smaller companies
- Asia Pacific
- UK Smaller Companies
- European Smaller Companies
- Global Emerging Markets
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