Know your attitude to risk

Published by on 24 June 2010.
Last updated on 25 August 2011

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A quick online search will throw up plenty of links to investment-risk calculators and questionnaires that you can use to get a sense of how you feel about risk.

However, if you want to work it out yourself, there are a number of things you'll need to consider.

For a start, think about your investment objectives and timeframe. You'll need at least five years if you're going to invest in the stockmarket, and the more time you have, the more risk you'll be able to take.

Stockmarkets do rise and fall, but if you can ride out the falls, the rises should more than compensate in the long term.  

Your current finances are also important. "Consider how much money you have to invest," says Justine Fearns, investments research manager at independent financial adviser AWD Chase de Vere.

"Don't overstretch yourself or start investing if you haven't any savings in place for emergencies."

Then you need to consider your risk appetite. "How do you feel about investing in assets that could fall in value?" asks Fearns.

"Higher returns mean higher volatility and higher risk, but if you can't stomach losing money then you shouldn't look to take on too much risk." 

Wherever you fall on the risk spectrum, Fearns says it's important to stick with your convictions, unless your circumstances change.

"This can be very difficult to do," she says, "especially if stockmarkets are rising fast and it feels like others are making more money, but it will help you achieve your goals over the longer term."

What kind of investor are you?

  • What am I investing for and how long?
  • How much money can I invest?
  • How do I feel about the value of my money going up and down over time?
  • How would I react if the value of my investments falls?
  • Am I prepared to accept more volatility to get potentially higher returns?
  • Can I afford for the money to disappear in a worst-case scenario?

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