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Understanding risk levels with investments

Understanding your risk level with investments

There is a huge choice with investments these days. this choice means that is it very easy to select a fund that is not appropriate for your individual needs. one of the key ways of making sure a fund is suitable for you is by making sure it aligns to your attitude to risk.

Which ever fund you look at these days, the fact sheet should have some indication of what level of risk it has . this will be done on a scale of normally between either 1 to 7 or on a scale of 1 to 10. For the purposes of this article I will focus on the risk scale 1 to 10. The higher numbers indicate the higher levels of risk but also the higher levels of reward potential

At risk level one you are looking at 100% cash funds, this means that on paper it isunlikely to lose any value but over the long term you risk inflation eroding your buying power.

At the highest risk levels, investments will be solely in shares and these will often be in emerging markets or in smaller companies. On the risk scale 1 to 10 risk levels four, five and six would generally contain a broad mixture of government bonds, corporate bonds and shares.

Risk level seven and above would generally be closer to 100% in shares. At risk level seven you are likely to be looking at funds which have a diverse share portfolio, where higher than (Risk levels 8 to 10) they may be in emerging markets or focused on small companies.

The higher risk level you go to the more volatility you should expect and this could cause you sleepless nights As values can fall dramatically in the space of a day or weeks. therefore you need to understand whether you can cope with the higher volatility or whether you would want more smooth performance that comes with having more of your fund invested in bonds and gilts.

The high risk level in theory should provide more of the time greater returns over time. however with all investments there is no guarantees and you could also have bigger losses. However as mentioned earlier the lower the risk level you have brings lower volatility but also means that you are more exposed to inflation risk.

Therefore you should look at doing an attitude to risk questionnaire to look at your personal circumstances and your own approach to understand what level of risk you should take and therefore what fund there might be appropriate.

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