Beginners' guide to risk and investment goals

What are some of the implications of risk?

As you would probably expect, generally the less risk, the less potential growth. On the other hand, the greater the potential return from an investment, the greater the risk that its value could fall.

Isn’t inflation a risk too?

If your money isn't earning at least the rate of inflation, your purchasing power is in decline. To avoid this, you should keep a regular check on the balance that you hold in your everyday bank and building society accounts. If it’s well above the amount you need to live on, you might want to consider higher earning accounts.

Alternatively, if you already have short-term savings put aside, you may want to consider other forms of investment. Have a look at ones that are more likely to outperform inflation over the period you wish to invest for, so inflation doesn't eat away at your savings.

How old are you?

Most people's attitude to risk tends to change over time. At 35, you may be more willing to invest for the long-term than if you’re older. The risk of equities fluctuating in value generally makes investment in them unsuitable for shorter terms.

Pension investors, for example, could decide to invest for growth in things like equities at a younger age, then start to move to less risky investments such as cash funds and bonds, in the years leading up to retirement.

How wealthy are you?

If you’re already well provided for, you may feel that you can take on more of a risk than someone who's relying on their investments to maintain their current standard of living.

What other investments do you have?

If you have a substantial amount of savings and investments, you may feel able to take a higher risk with some of your money to aim for a higher return, while keeping the remainder in lower risk investments.

What are your investment goals?

If you’re saving for a specific purpose or event as well as for your retirement, your attitude to risk may be different for the two separate goals. For example, you may want a lower risk investment on your retirement fund, but a higher risk investment for your ‘round the world cruise’.

How long are you investing for?

If you’re only investing for the short-term (up to five years), you're less likely to consider taking a risk with your money. With a longer period to invest, higher-yielding, higher risk investments could be an option.

One possible way to define investment periods is:

short-term - up to 5 years
medium-term - between 5 and 10 years
long-term - over 10 years.

Do you have family commitments?

If you have a family relying on you, you may be less willing to take risks with your money.