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Investment Risk

Investment risk is a concept which defines the security of the capital that you are investing. Different types of investments will carry different levels of investment risk according to how secure your capital, both in absolute and real terms.

For example, your £1,000 is guaranteed not to fall in value if you put it in a box under the bed and, assuming that it’s not stolen or lost in a fire, after twenty years, you will still have £1,000. Of course, the value of your £1,000 is likely to be far less in real terms because of the effects of inflation.

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Similarly, you could invest your £1,000 in company shares and find that after twenty years, the shares are worthless and you have lost your £1,000. Conversely, the shares could have grown in value, together with the addition of dividend income, and could be worth £10,000 or more. The increased investment risk that you have been prepared to take on has been to your benefit, resulting in increase investment returns. This is known as the risk and reward ratio – essentially, if you are prepared to take additional risk with your capital, this should be rewarded with potentially higher investment returns.

Lower risk investments will generally include cash deposits with an authorised bank or building society, National Savings products and gilts issued by the UK Government. Taking on a slightly higher level of risk will open up corporate bonds issued by UK companies through to company shares is large blue chip companies. At the higher risk end of the spectrum, you will find international company shares. This list is not exhaustive and you will find that categories of risk are not set in stone.

The level of investment risk adopted can be tailored to your own attitude by investing in a number of different asset classes, ie, cash, property, fixed interest securities and company shares and the proportion of each asset held and the type of the underlying investment will dictate the level of investment to be adopted.

For most private investors, the easiest way of achieving a suitable level of investment risk could be through a collective investment fund, which will be managed by an experienced, professional investment manager. He or she will decide the proportion of assets held and the underlying selection of stocks. Each fund will have a particular aim (ie, capital growth, regular income, combination of the two, absolute returns, etc) and adopt a specific level of investment risk in order to meet that aim.

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When considering any type of collective investment fund, whether it be a pension fund, unit trust, investment bond or investment trust, it is important that you seek the services of an independent financial adviser who will be able to assess your circumstances and look at your objectives in conjunction with your attitude to investment risk, thereby managing your expectations and selecting an investment medium that you are happy with.