Investing Smart – How to Measure Risk When Choosing Investments

Investing Smart – How to Measure Risk When Choosing Investments

The finance and pension markets are currently volatile, and most banks currently refuse to pass on interest rate rises to loyal customers. It is, therefore, unsurprising that people are thinking of turning to the investments market. They do so to try and make the most of their money and potentially boost their retirement. It has been reported that following the recent pandemic, more UK speculators decided to look into investing. This sparked an increase in calls to asset managers to get a handle on how and whether to build an investment portfolio or whether the risk is too great. 

But if you have never so much as dipped a toe into investments, you can be forgiven for feeling a little nervous. You may be unwilling to take risks with your hard-earned money.

Understanding Risk

Entrusting your investments to an outside party always carries some degree of risk. Even within the mainstream banking sector, there is the potential for things to go wrong. This is why bank accounts are protected by the Financial Services Compensation Scheme up to £85,000. In the world of investments, risk is defined as ‘the possibility of losing some or all of an original investment.’ In other words, you may not get the return you were expecting.

When it comes to deciding where to invest, as an example, government bonds are considered a much safer bet than corporate bonds. However, they will give a lower rate of return in comparison to the riskier corporate bond. When investing in companies, there is always a risk of a company going bankrupt. This could result in the loss of investors’ cash.  Certain companies are considered a safe bet for steady but unexciting returns. You have to decide whether you can afford to take risks with your assets. Essentially, you need to decide if you’d be prepared to lose money. Or, whether you’re happy to play it safe and accept more modest returns.

The First Steps

There is a myriad of information available online about how to invest. However, the best idea is always to see a reputable and qualified financial adviser. Choose one who specialises in assessing and building personal investment portfolios. This can be done in person or online by first completing a risk profile questionnaire. This can initially assess your willingness and/or ability to take risks with your finances. In other words, your risk aversion quotient will provide a clear picture of your willingness to go for high returns on the understanding that you could lose money or whether you are absolutely against the idea of losing money and understand that the returns on your investments may be lower. 

It is important to be completely honest about how risk-averse or otherwise you actually are and also about the state of your assets and liabilities.

Points to Consider In Terms Of Risk

Risk takes on many forms, so it is important to develop your risk management strategy, possibly through diversification of your investments, in other words spreading investments over a number of investment vehicles and regularly reviewing your position.

In conclusion, while you should certainly think about paying into a future pension it could also be worthwhile embarking on an investment portfolio to supplement your pension income or simply to provide yourself with a regular income.

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