Choosing Investment Based On Risk

Published / Last Updated on 14/06/2015

Investment Risk Explained

Investment Risk

  • "You can drive as fast as you like but you run the risk of being stopped by the police"
  • "What is the risk of a meteorite falling from the sky to destroy your house?"

Risk means different things to different people.

To you, driving above the speed limit may be not worth the risk, to your neighbour it may be worth the risk to get to work on time. It is a question of self judgement on how high you rate the likelihood of an event happening or not.

It is the same when investing your money be it in shares or any other investment.

  • Higher risk means a greater chance of fast growth but also a greater chance of loss.
  • Low risk means a safer, less volatile investment but with much lower chances of significant growth.

Investment risk is the uncertainty of a financial loss or gain.

It is also a personal matter - it is your interpretation of the risks associated with loss or gain.

Some may consider being in cash as high risk because it may not keep up with inflation.

To help you, we have categorised risk into five sections which are there only as a guide for you to follow or ignore as you wish.  We have also suggested products that can meet that risk category.

  • No risk
  • Low risk
  • Medium risk
  • Medium to high risk
  • High Risk

Your Basic Risk Profile

We suggest there are five basic risk profiles and sometimes a mixture for different types of investment for an overall risk profile as follows:

No Risk  (Volatility plus/minus 0% -5%)

  • You are not prepared to see any reduction whatsoever in the value of your investments.  You are only prepared to put your money into investments such as cash or short term fixed interest securities where the return of capital is guaranteed. You understand and accept that the future purchasing power of your capital is likely to be lower over the long term than if you hold investments based on shares and property. You also accept that the income from cash deposits can move up and down, sometimes quite suddenly and that there will possibly be a loss of real value due to inflation erosion.

Low Risk (Volatility plus/minus 5% -15%)

  • You are a cautious investor and would want a high proportion of your funds to be incash based or other guaranteed investments. However you are prepared for some of your investments to be in funds where there may be a limited degree of fluctuation in values in return for prospects of modest long-term growth.

Medium Risk  (Volatility plus/minus 15% - 30%)

  • You are a more typical investor, who wants some savings and investment in cash, mainly for possible short term needs. For the rest, you are prepared to see your investments fluctuate in return for a higher level of prospective growth in both income and capital. However, you would like to see a reasonable proportion of your investments in largely asset based investments such as with profit or managed funds. You may be prepared to put a very small part of your investments into higher risk funds where there is a small risk of loss.

Medium/High Risk (Volatility plus/minus 30% - 40%)

  • You want only the minimum level of cash deposits to cover short term needs. For the balance you are prepared to invest in asset based investments with very little in mixed funds such as with profit policies and managed funds. Your income requirements are relatively low and you can afford to take a long-term view of well over ten years. You like the idea of investing a significant amount of capital outside the UK and are prepared to invest 10% to 20% of your financial assets in higher risk funds.

High Risk (Volatility plus/minus 40% or more)

  • You only want the minimum level of cash deposits to cover short-term needs. For the balance you are prepared to invest in asset based investments with little or no managed fund or with profit fund investment. You are comfortable with investments in high risk funds, individual shares and even unlisted investments.

Overall Risk

  • I would like to have a range of risk profiles to make up my financial portfolio. Overall, the range should achieve an averaged risk level as marked above.

1. No Risk Investment

No Risk - To be held for the short term

  • You are not prepared to see any reduction whatsoever in the value of your investments. 
  • You are only prepared to put your money into investments such as cash or short term fixed interest securities where the return of capital is guaranteed. 
  • You understand and accept that the future purchasing power of your capital is likely to be lower over the long term than if you hold investments based on shares and property. 
  • You also accept that the income from cash deposits can move up and down, sometimes quite suddenly and that there will possibly be a loss of real value due to inflation erosion.

Investments products that can offer 'no risk' options:

  • Bank and Building Society Accounts
  • Cash ISAs
  • National Savings Products
  • Guaranteed Income and Growth Bonds
  • Short Dated Gilts
  • Index Linked Gilts 
  • Long Dated Gilts

Funds In Collective Investments (e.g. Pension Plans, Investment Bonds, ISAs, Savings Plans and Unit Trusts) that can offer 'no risk' fund options.

We consider 'no risk' funds to broadly have little or no volatility with a standard deviation of less than 0.5% and only carry a risk of inflation eroding capital.  The sorts of fund names to look out for are:

  • Cash Fund
  • Deposit Fund
  • Sterling Fund
  • Money Fund
  • Building Society Fund
  • Guaranteed Fund

2. Low Risk Investment

Low Risk - To be held for the medium term

  • You are a cautious investor
  • You want a high proportion of your funds to be in cash based or other guaranteed investments
  • You are prepared for some of your investments to be in funds where there may be a limited degree of fluctuation in values in return for prospects of modest long term growth

Investments that can offer 'low risk' options:

  • National Savings Products
  • Local Authority Bonds
  • Guaranteed Income and Growth Bonds
  • Index Linked Gilts
  • Long Dated Gilts
  • Foreign Government Securities
  • Commercial Fixed Interest Securities
  • With Profit Bonds and Savings Plans
  • Unit Linked Investment Bonds

Funds In Collective Investments (e.g. Pension Plans, Investment Bonds, ISAs, Savings Plans and Unit Trusts that can offer 'lower risk' fund options.

We consider 'lower risk' funds to broadly have lower volatility with a standard deviation of 0.5% to 1.5%. This means values can rise as well as fall but they are not large overnight falls or rises.  The sorts of fund names to look out for are:

  • UK Fixed Interest Fund
  • Property Fund
  • With Profits Fund
  • Defensive Managed Fund
  • Cautious Managed Fund
  • Distribution Fund
  • Protected Fund
  • Gilt Fund
  • UK Bond Fund
  • Money Market

3. Medium Risk Investment

Medium Risk - To be held for the medium to longer term

  • You are a more typical investor who wants some savings and investment in cash, mainly for possible short term needs.
  • For the rest, you are prepared to see your investments fluctuate in return for a higher level of prospective growth in both income and capital.
  • However, you would like to see a reasonable proportion of your investments in largely asset based investments such as with profit or managed funds.
  • You may be prepared to put a very small part of your investments into higher risk funds where there is a small risk of loss.  

Investments that can offer 'medium risk' options:

  • Stocks and Shares ISAs
  • National Savings Products 
  • Long Dated Gilts
  • Undated Gilts
  • Unit Linked Investment Bonds
  • With Profit Bonds
  • With Profits Savings Plans
  • Permanent Interest Bearing Shares
  • Convertibles
  • Unit Trusts and OEICS
  • Conventional Investment Trusts
  • Blue Chip Company Quoted Shares
  • Quoted Shares of Medium Sized Companies
  • Direct Property Trusts

Funds In Collective Investments (e.g. Pension Plans, Investment Bonds, ISAs, Savings Plans and Unit Trusts) that can offer 'medium risk' fund options:

We consider 'medium risk' funds to broadly have medium volatility with a standard deviation of 1.5% to 2.5%. This means values can rise as well as fall and can have modest and sustained overnight falls or rises.  The sorts of fund names to look out for are:

  • Global Fixed Interest Fund
  • Global Property Fund
  • Managed Fund
  • Balanced Managed Fund
  • Equity Income Fund
  • High Yield Fund
  • Global Bond Fund
  • All Companies Fund
  • All Share Fund
  • Index Fund
  • UK Tracker Fund

 

 

 

 

4. Medium High Risk Investment

Medium To Higher Risk Investment - To be held for the medium to longer term

  • You want only the minimum level of cash deposits to cover short term needs.
  • For the balance you are prepared to invest in asset based investments with very little in mixed funds such as with profit policies and managed funds.
  • Your income requirements are relatively low and you can afford to take a long term view of well over ten years.
  • You like the idea of investing a significant amount of capital outside the UK and are prepared to invest 10% to 20% of your financial assets in higher risk funds.

Investments that can offer 'medium to higher risk' options:

  • Stocks and Shares ISAs
  • Long Dated Gilts
  • Undated Gilts
  • Unit Linked Investment Bonds
  • With Profit Bonds
  • With Profits Savings Plans
  • Permanent Interest Bearing Shares
  • Convertibles
  • Unit Trusts and OEICS
  • Conventional Investment Trusts
  • Blue Chip Company Quoted Shares
  • Quoted Shares of Medium Sized Companies
  • Direct Property Trusts
  • Zero Coupon Preference Shares
  • Smaller Company and AIM Shares
  • Emerging Markets Unit and Investment Trusts
  • Enterprise Zone Trusts
  • Direct Property Trusts
  • Options
  • Commodities
  • Venture Capital Trusts
  • Enterprise Investment Scheme
  • Unquoted Company Shares

Funds In Collective Investments (e.g. Pension Plans, Investment Bonds, ISAs, Savings Plans and Unit Trusts that can offer 'medium to high risk' fund options.

We consider 'medium to higher risk' funds to broadly have higher volatility with a standard deviation of 2.5% to 3.5%. This means values can rise as well as fall and can have higher and sustained overnight falls or rises. The sorts of fund names to look out for are:

  • Stockmarket Managed Fund
  • Global Managed Fund
  • Global Equity Fund
  • FTSE Tracker Fund
  • Europe Fund
  • North America Fund
  • Japan Fund
  • Far East Fund
  • UK Smaller Companies Fund

5. High Risk Investment

High Risk Investment - To be held for the medium and longer term

  • You only want the minimum level of cash deposits to cover short term needs.
  • For the balance you are prepared to invest in asset based investment with little or no managed fund or with profit fund investment.
  • You are comfortable with investments in high risk funds, individual shares and even unlisted investments.

Investments that can offer 'higher risk' options:

  • Stocks and Shares ISAs
  • Long Dated Gilts
  • Undated Gilts
  • Unit Linked Investment Bonds
  • With Profit Bonds
  • With Profits Savings Plans
  • Permanent Interest Bearing Shares
  • Convertibles
  • Unit Trusts and OEICS
  • Conventional Investment Trusts
  • Blue Chip Company Quoted Shares
  • Quoted Shares of Medium Sized Companies
  • Direct Property Trusts
  • Zero Coupon Preference Shares
  • Smaller Company and AIM Shares
  • Emerging Markets Unit and Investment Trusts
  • Enterprise Zone Trusts
  • Direct Property Trusts
  • Options
  • Commodities
  • Venture Capital Trusts
  • Enterprise Investment Scheme
  • Unquoted Company Shares
  • Alternative Investments
  • Futures

Funds In Collective Investments (e.g. Pension Plans, Investment Bonds, ISAs, Savings Plans and Unit Trusts) that can offer 'high risk' fund options.

We consider 'higher risk' funds to broadly have high volatility with a standard deviation of over 3.5%. This means values can rise as well as fall and can have high, dramatic and sustained overnight falls or rises. The sorts of fund names to look out for are:

  • Opportunities Fund
  • Global Opportunities Fund
  • Smaller Companies Fund
  • Europe Smaller Companies Fund
  • North America Smaller Companies Fund
  • Japan Smaller Companies Fund
  • Far East Smaller Companies Fund
  • Emerging Markets Fund
  • Global Emerging Markets Fund
  • BRIC (Brazil, Russia, India, China) Fund
  • Latin Fund
  • Tiger Fund
  • Asia Pacific Fund
  • Special Situations Fund
  • Specific targeted funds e.g. Health, Financials
  • Specific country funds e.g. India, China, Brazil, Poland  

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