Risk vs. Reward

While homeowners can still benefit from low mortgage rates, savers will be struggling to enjoy any kind of growth on money they have on deposit, leading some to consider a riskier investment.

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What’s your appetite for risk?

If you’re considering investing in the stock market, one crucial and very personal issue is how you feel about the prospect of putting money at risk and your ability to accommodate any loss in value.

It’s a fact that risk and the potential for reward go hand in hand: Investments that are low in risk are low in potential reward, whereas the more risk you’re willing to take with your money the greater the potential for reward.

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Factors in determining risk

As investment advisers, we will consider a range of factors when assessing your attitude to investment risk:

Age – how old you are may affect how you would like to invest, particularly the closer you get to retirement.
The need for emergency cash – you should always keep a certain amount readily accessible (for example, in a deposit account) in the event of an emergency or as a foundation for your longer-term savings and investment.
Can you afford to take a risk? – If your investments dropped in the short term, do you have the time to wait for them to recover?
Can you afford not to take a risk? – leaving all your money on deposit may carry minimal risk, but you may miss out on higher potential returns and possibly see the spending power of that money fall due to inflation.

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Selecting the Right Investment Strategy

Once you are clear about the risk you need to take to reach your goals you’ll need an investment strategy that is finely calibrated to deliver the results you’re looking for. This is where a number of other key aspects of investment come into play;

-Avoiding the ‘eggs-in-basket’ principle; making sure your portfolio is invested across a range of assets in order that the positive performance of some, neutralises the negative performance of others.
-Making sure your money is in the hands of some of the best and most consistent investment managers in the business with a track record of success.
-Ensuring you can give your investments time to bear fruit – the longer you can leave your investments in place, the more likely you are to cope with any short-term changes in market value.

In Summary

Good investment advice involves building a clear picture of the results you’re looking for, taking into account your current financial position, your future goals and your personal attitude toward the subject of investment risk.

The value of investments and any income from them can fall as well as rise. You may not get back the amount originally invested.

Brian Downton is Director of Downton & Ali Associates, offering expert advice in Mortgages, Pensions, Investments and Protection.

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