How much risk is right for me?

Choosing how much risk to take with your investments can be a nerve-wracking task.

Taking too much risk could leave you vulnerable to big drops in the value of your investments. Too little risk could mean your investments don’t grow quickly enough to meet your goals. Bit of a catch-22, right?

Start by thinking about your circumstances, your goals and how you feel about the value of your investments moving up and down. That’ll help you join the dots and decide what level of risk could be right for you.

Like most things, risk is personal. There’s no one-size-fits-all approach. What’s too risky for one person, might not be too risky to the next – the best person to decide how much risk to take is you.

Here we’ll give you information to help you manage your risk, but it isn’t personal advice. If you’re not sure what’s right for your circumstances, seek financial advice.

Know your goals

It’s important to know what you want to achieve from investing. This may seem like an obvious thing to say, but it’s something that occasionally goes under the radar.

For most of us it’s all about securing a better financial future. We do this by increasing our wealth, or at the very least preserving it, over the long term.

And while we all have that same common goal, you’ll also have key personal milestones to aim for along your investing journey too. Whether that’s getting on the property ladder or perhaps helping towards your grandchildren’s university fees.

Even if you’re simply saving for your retirement which seems like a month of Sundays away, you can never be too prepared. It’s good practice to stay one step ahead and plan for your later life – things like where you want to live or what’s left on the bucket list.

Knowing your goals and what you want achieve from investing will help shape the overall risk profile of your investments.

Time, time and more time

Now that you know your goals, you should have a ball-park figure for how many years you need to invest. But also, the level of annual returns necessary to meet those goals on time.

The more time, the better. It gives you a better opportunity to reap the rewards of compounding – arguably the number-one weapon in an investors’ toolbox.

Albert Einstein may or may not have called compound interest the most powerful force in the world – I guess we’ll never know. But it’s certainly true that whoever understands it earns it, and whoever doesn’t pays it.

If you’re investing for 10 years or more and retirement isn’t on the horizon anytime soon, you can afford to be more adventurous with your investments. Just make sure you’re comfortable with the higher risks that comes with a more lion-hearted approach.

Investments tend to perform better over the long term. Any bumps in the road along your investment journey are smoothed out as the stock market has ample time to bounce back. Remember though, investing doesn’t come with any guarantees.

For those investing for around five to ten years, you might want to take a more cautious approach and shy away from unnecessary risks. Market drops can be damaging for investors with a shorter timeframe. It could lead to selling your investments at a market low point when you need to access your money.

If your time horizon is less than five years you should keep your money tucked away in cash savings. Just make sure you shop around for the best rates – the Active Savings service could help.

Attitude to risk

Investing in the stock market demands mental strength and resilience. Seeing the value of your investments tumble can be a difficult watch. They say the pain of losing money can be psychologically twice as powerful as the pleasure of gaining money.

With that in mind, it’s important for investors to build and maintain an investment portfolio that matches their attitude to risk. Remember, the more risk you take, the more your investments will move up and down in value.

If you’re reading this as a new investor, it could be worth dipping your toe in investing waters at the shallow end. As you gain more experience and know-how, you can start to accept more risk. Confidently leaping straight into the deep end without earning your investing badges first doesn’t usually end well.

To better manage your emotions and risk, ask yourself how you’d feel about the value of your investments dropping by 5%,10% or perhaps 20% overnight?

Thinking about your investments falling in value might feel uncomfortable, but it’s important to plan for the worst-case scenario. This should help you decide what investment types are right for you – we’ve already looked at why some investments are riskier than others.

Investments move up and down in value – that’s their risk. Investing in a way that suits your attitude to risk gives you the best chance of holding your nerve on the bad days, to then reap the rewards on the good days.

Managing your risk – two common investment mistakes to avoid

Putting it all together

Once you’ve figured out your goals, your time horizon, and your attitude to risk, it’s time to put it all together.

Find out more about how to build an investment portfolio

Hand-picking a mix of investment types – shares and bonds – isn’t the easiest of tasks and can take up hours of your spare time. So why not let the experts do the hard work for you?

Funds offer an easy and convenient way to invest for both novice and experienced investors.

A fund is an investment that pools together money from lots of individual investors. A professional fund manager then invests the money in a wide range of investments like UK shares, overseas shares and bonds.

Investing in funds make it easy to diversify your portfolio and reduce risk. Holding a mix of investments is much better for the health of your portfolio, as you aren’t relying on one or two individual stocks to perform.

Need help managing risk?

Our investment research team have put together some investment ideas to help you get started, but they’re not a personal recommendation to buy.

Mixed investment funds can be a great way to spread money across lots of shares and bonds – helping achieve greater returns with a relatively-lower level of risk.

For investors prepared to accept more risk, small and mid-sized companies funds can offer you an adventurous, but higher risk, way to grow your wealth.

Investing in funds isn’t right for everyone. Before investing it’s important to check the fund’s objectives align with your own, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment.

Remember, funds go down as well as up in value, so you could still get back less than you put in.