Where to invest your money now to cash in on recovery or fresh disaster

Is the world teeming with opportunity or full of danger right now? For shrewd investors, the answer is, of course, both – and if you make the right calls, you can expect to profit. There’s no avoiding it: investing and risk go hand-in-hand. The truth is that understanding risk is less risky than not investing at all.

 

Nobody has a crystal ball

But what is risk? In its simplest sense, risk is the variability of returns. Investments with greater inherent risk must provide higher expected yields if investors are to be attracted to them. Risk can take many forms, including valuation risk (paying too much for an asset), currency risk, exchange rate risk, market risk, political risk and volatility. Assessing which investments will perform well in future is much harder than looking at which have done well in the past – nobody has a crystal ball.

Leading rather than following the herd

To make money from the stock market, for example, you need to anticipate which companies everyone else will choose, and buy them first. This means leading rather than following the herd. When investment markets have fallen, it is human nature to shy away, fearing further losses. Yet history has shown that this is often the right time to buy. Likewise, when good news abounds and markets are making progress, it’s easy to make the decision to invest – yet the optimism at such times often means stock prices are too high.

Don’t minimise the chance of achieving your goals

Risk is a fact of life for any investor. Thanks to inflation, there’s even risk in doing nothing. To earn rewards you have to assume some level of risk. If you minimise risk you may also minimise your chance of achieving your goals.

Understanding the level of risk you are willing to take is crucial – a process known as ‘risk profiling’. This is essential as the more accurate your risk profile, the greater the chance of selecting the most suitable investments for your needs.

An important part of the risk profiling process

Of course, your personal circumstances form an important part of the risk profiling process. Are you investing for retirement or looking to save for a luxury holiday? Your age is also important: if you are a young investor saving for a pension, you may be more likely to take higher levels of risk due to the greater length of time to recover short-term losses.

All types of investment carry some risk of making a loss; the main thing is to be comfortable that your investments represent, as closely as possible, a level of risk acceptable to you, and continue to do so.

Helping you measure your appetite for risk more precisely

Historically, some of the measures of risk for various investments have been somewhat broad-brushed. Many investors have been categorised on three levels: ‘cautious’, ‘balanced’ or ‘aggressive’. There are now many sophisticated risk profile questionnaires and online tools available to help you measure your appetite for risk more precisely, with investment strategies designed to match the outcome.

Increase your chance of better long-term returns

There’s no rule to say you have to have a diversified portfolio, but investors who focus on one area will only be right some of the time. Diversifying increases your chance of better long-term returns. This includes choosing investments across different asset classes (for example, shares, bonds and commodities), geographical regions and also fund management styles. Bear in mind that your portfolio can also be too diversified. Too many investments and your portfolio will tend towards the average and simply track the market. Remember that over time, as your personal circumstances and the economic outlook change, so too might your attitude to risk. So it’s essential that you regularly review your investments to make sure they continue to reflect your needs.

Levels and bases of and reliefs from taxation are subject to legislative change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.