What's your attitude to risk?

Award-winning national newspaper journalist Holly Black on the importance of understanding your attitude to risk

Determine your risk appetite

"Investing for the first time can be an unnerving experience. Every investment website and fund has a disclaimer warning that the value of your money can go down as a well as up, and that can be a worrying prospect.

But even those with a smaller appetite for risk can still find an appropriate investment to suit them. Determining your risk appetite is a crucial first step in the investment journey. Taking more risk with your investments can offer the potential for greater returns but it can also mean more ups and downs along the way.

Investors need to work out how much risk they are comfortable taking without having to endure sleepless nights worrying about their money."

What you're prepared to risk may change with age

"Younger investors, it is generally said, who wish to invest for the long term, tend to feel more comfortable investing in racier funds. This could mean choosing funds focused on emerging markets and smaller companies, which can offer good growth prospects but come with a greater risk of falls. The reason these are often deemed appropriate for younger investors, however, is that they have a longer investment time horizon.

If you are investing for your retirement when you are in your 20s then you may have some 40 years to ride out any ups and downs in the value of your investments. But this will not be the right strategy for everyone."

Seek advice on how much to risk

"No matter their age, some people are naturally more risk averse than others and should not invest in anything that’s going to cause them concern. Assessing your risk appetite means being honest with yourself about what your investment goals are and what level of ups and downs you are willing to tolerate along the way to achieve those objectives.

Some people will prefer lower returns with fewer dips throughout their investment journey, whereas others are comfortable to ramp up the risk in the hope of greater gains. A Financial Adviser can help you to determine your risk appetite and point you to the most appropriate investments."

Online risk appetite questionnaires can be helpful for those taking a do-it-yourself route. These may ask multi-choice questions such as: “When you think of the word ‘risk’ in a financial context, which of the following words comes to mind first? Danger, Uncertainty, Opportunity, or Thrill” and “How easily do you adapt when things go wrong financially?”

Which investments are right for you?

"Once you have worked out your attitude to risk, it is time to put it into practice and decide what the investments are which will fit your risk profile. But choosing your investments should take into account not only your risk appetite but also the length of time you are planning to invest for and your goals.

Depending on how they plan to take their pension benefits, someone approaching retirement may be steered towards quality bond funds, which invest in the debt of companies with strong balance sheets and Gilt funds, which invest in UK Government debt. The reason for choosing these types of funds are that their returns are typically steadier because the assets they invest normally pay a steady coupon (interest payment) and the companies and governments they invest in are less likely to default on their debt.

Medium-risk investors may be willing to tolerate more ups and downs in the value of their investments so may invest across a range of assets in order to provide some growth potential while also having some income-paying funds to help smooth out performance along the way. While investors can build their own portfolio of funds, which they feel meet their risk appetite and will deliver on their investment objectives, many may prefer an expert to make these decisions for them."

Multi-asset funds

"Multi-asset funds are becoming increasingly popular among investors who want a one-stop shop option for their investments.

These typically see a manager invest in a range of assets or in a number of different funds, according to a particular mandate. For example, a multi-asset fund in the Mixed Investment 20-60% Shares investment sector, will only have a proportion of investments in company shares, so this may be a good option for investors at the medium range of risk appetite. Meanwhile, a Mixed Investment 40-85% shares fund is likely to appeal to those with higher risk appetites where the majority of the fund is invested in equities. Funds are managed according to a specific risk rating, which may provide peace of mind for those investors to whom risk (or lack of it) is a priority.

Determining your risk appetite for each of your pots of money is a crucial part of the investment journey and will have a major bearing on your experience over the years; you may want to take a different approach depending on when you need the money, for example taking a high risk approach to your retirement savings if you have longer to wait for retirement.

Once you have worked out your attitude to risk, however, it is important not to become complacent. Your feelings will likely change over the years along with your aims and objectives, so it is important to review your risk appetite every few years to ensure all of your investments are still appropriate and working as you want them to."