Understand risk

What you'll learn:

  • the link between risk and reward 
  • the level of risk you’re comfortable with and how much you can afford to lose.

The link between risk and reward

Risk is linked to the growth potential of investments. Growth isn't guaranteed and investments might not perform as you'd expect. Generally, the greater the risk you’re prepared to take, the greater the potential for growth. But this could also bring a greater potential for losses particularly over the shorter term. The longer you invest, the longer your investments have to ride out the ups and downs of financial markets, such as the stock market.

If you plan to invest for a shorter time, you may be less willing or able to take a higher risk.

Being too cautious with your investments could mean ending up with less money than you need. While your savings are less likely to fall in value, they're also less likely to grow as much.

What’s your approach to risk?

It’s good having a view on how much you’d like your investments to grow. It’s even more worthwhile to think about how much you’d be comfortable losing if your investments don’t perform as you expected.

Things to consider

Your full financial picture

Consider your full financial situation. What other investments or savings do you have or expect to have in the future?

Your future financial situation

Consider your current and future income position, expenditure and any debts you have. Are you expecting changes to any of these?

Your investment goals

How important is this investment to your future? For instance, for your retirement. Do you have other sources of income or savings that you could fall back on, now or in the future, if the value fell?

How long can you invest for?

Think about how long you’ll be investing for.

How much risk do you want to take?

Think about how comfortable you would be with significant or regular changes in the value of your investment.

Understand the risks

Is investing right for me?

This should be the first question you ask yourself before making any investment decisions. As all investments involve a degree of risk, you should really be thinking about investing for the medium to long-term – to smooth out the ups and downs of the markets. If you can’t make a commitment of 5 years of more, investing may not be appropriate for you.

It may be the case that in the long term your investment could provide a better return than savings, however risk and reward go hand-in-hand and you should be willing to accept this risk before making an investment.

Am I ready to invest?

Investing does involve risk, and you should only invest if you have enough in cash savings. 

Before you think about investing, we recommend you have a safety net of savings that you could live off for around three to six months. This is to make sure you can cover any expenses or emergencies without having to prematurely sell any of your investments.

Understanding risk

  • The value of any investment, and the income from it, can go down as well as up and you may get back less than you originally invested.
  • When you’re researching stocks, it’s important to understand that the past performance of any investment is no guarantee of how it’ll perform in the future.
  • Tax laws can change and any tax advantages will depend on your individual circumstances.

Managing risk

One of the ways you can try and manage risk is to diversify – spread your investments across a range of markets, sectors and investment types. You could also try to invest smaller amounts regularly, rather than as a single lump sum – investing regularly over a longer period of time can help smooth the ups and downs of the stock market.

It is, however, important to remember that nothing’s guaranteed and you could lose some, or all, of your money whatever the level of risk.

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