You’ve taken the first step and decided to start saving or put a lump sum into an investment fund. But what are the next things to consider? There are 3 other big decisions you need to make: what level of risk you are willing to take, i.e. you risk attitude, how long you are happy to put your money away for and how much control do you want over your choice of investment funds.
An independent financial broker can help you answer each of these 3 questions. They will take into account what your objectives are and help you set financial goals. But to get you started we’re going to look a little closer at risk.
The chance or possibility of danger, loss, injury or other adverse consequences“
What is risk?
In simple terms, Investment risk is a measure of the level of uncertainty of achieving the returns as per the expectations of the investor. So as an investor you need to decide what your attitude to risk is. In other words, what level of risk are you willing to take on when investing your money.
While we are all familiar with certain types of risk and can take measures to protect ourselves, risk in the context of investing is not necessarily something that can be avoided. Ups and downs are a natural part of investing but how comfortable will you be with a spikey graph rather than a smooth one? Generally, the more risk you take, the higher the potential returns. Likewise, the less risk you take the smaller the potential return but also the smaller the potential loss.
What influences risk
There are several factors that will dictate your attitude to risk. These include the very important question as to how much risk can you afford to take. We all have our own feelings when it comes to risk and take day to day risks on various scales. When it comes to investment risk you need to carefully assess how much risk you can afford to take on. In real terms this is how much can you afford to lose or what is your “capacity for loss”?
Coupled with this is the question of how long you can put your money away for. Longer term investments can benefit more from market ups and downs and recover from these while shorter term plans don’t always have time on their side. So, your attitude to risk may vary depending on what the financial goal is. If you are in your 20’s starting a pension plan you will have a greater capacity for loss than if you are in 50’s. Similarly, a 5-year savings plan for your dream holiday would be treated differently to a longer-term education savings plan started when your children are only babies.
All funds carry a risk rating. This lets you, the investor, get an idea of what level of risk these carry. The European Union (EU) law also requires Irish investment companies to indicate a level of risk for each fund using a prescribed approach. This involves a risk rating scale of 1-7 (very low risk to very high risk). This is to help investors compare similar products and funds offered by different providers.
Hopefully now you can consider your attitude to risk in relation to your current circumstances, your financial goal, and your capacity for loss. There are several different tools and calculators to help you work through this, here’s one to try.
At Premier Insurances, our highly skilled advisers can help you decide on your risk level and advise you on the best fund and product selection to help you meet your goals. Just get in touch!