All investing involves risk in the pursuit of potential gains. However, our attitude to risk and the amount of risk we’re happy to take can vary markedly from person to person. It can also change with age.
An important part of working with your financial adviser will be to establish how much risk you’re comfortable with and the impact that has on the rate of return you can realistically expect to earn. You should bear in mind that the level of return can vary from year to year and that past performance is not a guide or a guarantee of future returns.
Each asset class – shares, bonds, cash or property has its own risk profile. During your younger years, you may want to invest in assets with a higher potential for growth but greater risk because you have the time to benefit from their long-term growth. As you get closer to retirement your appetite for risk may well change; then you may want to choose more conservative investments that are steadier in both risk and return.
In order to determine where you are on the spectrum of risk tolerance, it’s important to think about what your attitude would be to the possibility that you could lose money on your investments if markets were to fall sharply. Your investment time horizon is important too; it’s often easier to adopt a more aggressive approach to risk if you still have many years before you need to access your cash.
Typically, you could position yourself anywhere on the spectrum from a conservative investor looking for a low-risk near-cash investments that can potentially produce a steady but unspectacular return, through to an aggressive investor who’s happy to acquire riskier investments in less-mature markets that could produce potentially higher but less certain returns. Unsurprisingly, many people position themselves somewhere in between, as moderate investors willing to take some risk, but anxious not to face the prospect of losing too much capital.