M&G Spin-Free Guides – What is risk?

??? In investing there is a close relationship between risk and return. You could not only avoid unnecessary risk, but also make it work in your favour. What is risk? INVESTMENT INVESTMENT RETURN RETURN Risk is the possibility of losing some, or all, of your capital (your original investment). Risk refers to uncertainty. All investments carry a level of risk. RISK So why take risk? RISK In general, higher risk investments have a higher potential return, whereas lower risk investments usually give a lower return. The more risk you take, the more your investment could grow. Conversely, the more it could fall. LOW HIGH LOW HIGH HIGH LOW HIGH LOW RETURN RETURN RISK RISK RSK FISK HIGH (£ LOW HIGH LOW HIGH LOW LOW HIGH HIGH LOW HIGH LOW HIGH LOW HIGH LOW RETURN FTUR RETURN RETU Cash savings Bonds Equities Property A savings account is low risk. Up to £85,000 of your savings are protected by the Financial Services Compensation Scheme. But your money will only grow in line with interest Equities are shares in a company. The growth of your investment depends on the fortunes of that company. Although there is no limit to how much your investment could grow, Bonds are like giving a The amount of income fixed-term loan to a you can make from property can fluctuate according to the general trends of the housing market. Although property is considered more stable than equities, your initial investment is still not company or government. You can make an income from interest on the 'loan'. At the end of the fixed term your capital should be repaid. There is a risk of default on payments, which varies greatly depending on the issuer. rates so there's little there is also no limit to how chance of growing your much a share price can fall as well. You may lose your original investment. capital. secure. And how much risk to take? To find the level of risk that's right for you, you need to think about your plans. How much time How much money do you have to allow your investment to grow? would you like to have at the end of your investment period? £1,000 invested over 25 years- after inflation adjusted Taking too much Take too little risk £4,000- in the long term and you may not have enough money for your needs. A low-risk risk in the short EQUITIES term could proe problematic. A high-risk high short term risk £3,000 - BONDS PROPERTY high long term growth investment may grow your money over the long term because you have investment may leave you with less £2,000 - money over the long term if the interest rate is less time to recover from the £1,000- CASH short-term dips. than inflation. But your savings would be safer in However, in the £O short term you could lose money. Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 the short term. Source: Morningstar, Datastream and M&G Statistics: FTSE All Share Index; FTA British Government Fixed All Stocks; UK Savings 2500+ (NX); IPD Index. Past performance is not a guide to future performance. What common types of risk are there? I. Capital risk You may not get back your initial Currency risk You invest Credit risk Inflation risk Interest rate risk Changes may affect your Market risk A company or Inflation may The market collapses from perhaps a major economic shock government overseas and erode the investment failing to make need to convert value of your payments on a bond. amount. your money investment investment. back into over time. or institutional Sterling. failure. Different types of risk may affect investments to varying degrees. Managing risk FUND A diversified portfolio could be more Investing the same amount over the long term on a regular basis smoothes out the highs and lows in price movements. Invest through a managed fund and you won't invest alone - you'll pool your money with others and spread it across a wider range of investments. stable as the market rises and falls. Combining bonds, equities and property may reduce the impact of shocks. The value of stockmarket investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. M&G INVESTMENTS Issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The registered office is Laurence Pountney Hill, London EC4R OHH. Registered in England No. 90776