How To Assess The Risk Of Any Investment

low to ASSESS THE RISK OF ANY INVESTMENT Understanding Risk There is no such thing as a no-risk investment The possibility that you can lose money always exists RIS PEE HIGH LOW Higher risk means a greater chance of fast growth but also a greater chance of loss Risk in this business means that if you want to gain more, you have to accept the potential to lose more Low risk means a less volatile investment but with much lower chances of significant growth Types of Risk LOW HIGH Higher risk investments are Low risk investments are more less predictable predictable Taking a chance on the stock market There is thought to be just a small chance of losing can deliver substantial gains some or all of your money Some risky investments will be gambled upon new companies which might amount to nothing Very little profit or loss will change hands But if you pick a winner, the financial rewards But money will move more than if it is kept in a savings account can be great MARKET RISK % The chance that there might be a reduction in values as £ a result of a fall in the entire stock market (Normally due to national events and crisis) INTEREST RATE RISK CURRENCY RISK A private, fixed interest security falls in value as a result of a rise in national interest rates With overseas investments - eg when sterling may depreciate against the investing currency UNIQUE EVENT RISK POLITICAL RISK The issuer of a The risk that security being unable to pay interest or repay capital due to a major unexpected event such as a a changing government will have different fiscal and INVESTMENT- SPECIFIC RISK monetary objectives natural disaster, The possibility there could be a reduction in value as a result of war, etc circumstances related to a specific company (Most recently VW Emissions) III What is your attitude to Risk? Some are happy to live with calculated risks if it means the chance Others are risk of a higher return in the long run averse and don't want to risk their capital under any circumstances YOUR OWN ATTITUDE TO RISK IS CRITICAL 5yrs Your risk tolerance is tied into to your investment timeframe If you will need to access your cash within five years, bigger risks are unlikely to be worth taking The longer your timeframe, the more you can withstand short-term losses and see the value of your investment recover How to mitigate Risk? Placing all your eggs in one basket increases the risk of something going wrong If you want to earn more than just interest on a savings account, diversifying and spreading your investment enables you the play it safer This strategy is far less risky than focusing on one company, whose share price will rise and fall in line with their fortunes You can also select a fund - Managing 'collective investments', where your money is pooled together with thousands of other investors By smoothing the returns, funds are generally a far safer investment compared to buying individual company shares As the potential for gain is reduced, so too is the potential for loss How to Diversify There are many opportunities for diversification with shares, for example you can spread your investments between: The UK and Different sectors Both large and small companies (industrials, financials, oils etc) overseas markets If your portfolio is too heavily concentrated in one area. Here are some common problems to look out for: If all your cash is in a single savings account, you should think about spreading it between an instant access savings account and other alternatives If you have a lot of cash (more than six months' worth of living expenses) you should consider putting some of it into investments like shares and fixed interest securities FIXED If you're heavily invested in a single company's shares (perhaps your employer) start looking for more companies to invest in £ How and where to Invest Your investment choice will be as individual as you are. Where you are in life, your financial position and how you feel about risk is crucial to making a sound investment decision. ! • £ • It is CRITICAL to work out how much money you could face losing without it having a negative impact on your lifestyle or emotional well-being. Before investing you need to work out how you would cope if your investments fell by 10%, 30% or 50%, then you can set a limit for yourself. Set your expectations within reality - many people lose a lot of money gambling with investments. How much are you happy to lose? Approaching risk without many funds You should be prepared to put your money into investments such as cash or short term fixed interest securities where the return of capital is guaranteed 'No risk funds' have little or no volatility with a standard deviation of less than 0.5% and only carry a risk of inflation eroding capital Investment products that can offer LIMITED RISK options Bank and Building Society Accounts Cash ISAS National Savings Products Guaranteed Income and Growth Bonds Short Dated, Index Linked and Long Dated Gilts The next step up in risk is investing in funds where there may be a limited degree of fluctuation. You are likely to gain or lose a small sum of money. Investments that can offer LOW RISK options Foreign Government Securities Commercial Fixed Interest Securities With Profit Bonds and Savings Plans Unit Linked Investment Bonds Handling risk with lots of cash If you would like to see a reasonable proportion of your investments in largely asset based investments such as with profit or managed funds - medium risk is the way to go. Here are are just a few Stocks and Shares ISAS National Savings Products Long and Undated Gilts Unit Linked Investment Bonds With Profit Bonds Permanent Interest Bearing Shares Convertibles Unit Trusts and OEICS High risk investments exist if you only want the minimum level of cash deposits to cover short term needs. You should be prepared to invest in asset based investment with little or no managed fund or with profit fund investment You should also be comfortable with investments in high risk funds, individual shares and even unlisted investments Here are some of the risk options Permanent Interest Bearing Shares Convertibles Unit Trusts and OEICS Conventional Investment Trusts Blue Chip Company Quoted Shares Quoted Shares of Medium Sized Companies Direct Property Trusts Emerging Markets Unit and Investment Trusts Enterprise Zone Trusts Direct Property Trusts Options Commodities Venture Capital Trusts A word of warning! Never stop learning the process and always seek new knowledge in how to make smart investments If you are keen to start investing large sums of money but are unfamiliar with how to do so - it is worth investing in professional help first! SYNAPTIC.CO.UK