Low, Medium and High Risk Investments – What does that mean?

Have you been asked if you would like a low, medium or high risk investment? Do you know what that means? And do you know which approach is right for you? We are going to look at this in a little more detail.

Why would you consider this approach at all?

We always recommend clients have a well diversified investment portfolio, spread across a range of funds and asset classes. In most instances, this would apply to how your pension was invested, as well as any ISA investments you might have. You should note that Group Pension Schemes have a “default” investment fund. The pension contributions will be invested into the default fund unless the employee selects their own investment fund or portfolio.

So, let’s start with a low risk investment.

Typically, low risk would mean a more reduced exposure to equities – usually between 30-35% of your investment. The remainder of the portfolio is likely to be invested in government bonds or corporate bonds. This means that the returns are usually lower, but it makes it more suitable for the cautious investor.

Medium risk has a higher exposure to equities than low risk. Usually the exposure is between 50-65%, whilst in high risk portfolios the percentage increases to 70-85%. Again, the rest of the portfolio is likely to be invested more cautiously in government or corporate bonds.

The assumption is that the higher the risk, the greater the return. But, of course, that is not always the case, hence it being perceived as a risk. You can achieve phenomenal returns on high-risk investments but beware, as conversely your portfolio can also decrease by negative growth, in other words, the value of your portfolio can reduce significantly.

And that brings us neatly on to the next thing to consider.

Whilst you might be asked what risk profile you have, you also need to reflect on your “capacity for loss”.

You might want a high return, but you may not feel comfortable about your investment dropping drastically and having to wait longer for the fund or portfolio to recover. This is something many investors fail to consider, and, in our opinion, this is the most important consideration.

You can opt for some balance across all of your investments. So, you might choose to be more cautious with your pension, whilst being a little more adventurous with your ISA investment, for example.

Your attitude to risk will also be driven by your stage in life.

If you are in your early twenties, and just starting your pension, you can afford to be less cautious. You will have plenty of time to make up any losses – typically you cannot access it for the next 25 or so years. Equally, starting your investment journey and watching your fund performance can be very exciting.

By the time you reach your fifties and retirement is looming close on the horizon, you will naturally be more cautious. You are close to drawing your pension, so you cannot afford to make a loss, or it can severely impact your quality of life post retirement.

So, when making a decision about your attitude to risk, it is very important to consider your capacity for loss, where you are in your life, what other investments or assets you have available and your dependents. It is never straightforward, and you need to weigh it all up, before deciding on your risk profile.

If you would like to discuss your risk profile in more detail, or your investments, please contact us on 01344 875 310.

low medium and high risk investments