The importance of risk

One of the main areas you should consider when investing is the risk involved. Here, we look at the importance of risk and how we can manage it.

What is risk?

Risk and reward often compliment each other - taking on higher risk will potentially generate a higher reward. This is of course not guaranteed but gives you an idea of the relationship between risk and reward. When you're choosing Funds you need to consider both your risk capacity and risk attitude.

  • Risk capacity - your ability to take risks is determined by your personal circumstances, time horizon and investment goals.
  • Risk attitude - your personal willingness to take risks; are you comfortable or uneasy about your investment choice?

Manage risk

Once you have established your level of risk tolerance, it is a good idea to manage it by diversifying your investment. Generally speaking, Cash products bear the lowest risk followed by government and corporate bonds whereas equities are considered to carry the highest level of risk as they are more volatile over the economic cycle. Investing your money across different asset classes e.g. equities, bonds, Cash and in different geographical locations can help spread risk and smooth out returns.

It is a good idea to review your portfolio regularly to ensure your investment still matches your risk profile and goals.

Morningstar Risk

You may find it useful to filter the Funds by Morningstar Risk (Under the Risk tab) on : explore as it is designed to help you assess the relative risks of investing in each of the Funds.

This is an assessment of the variations in a Fund's monthly returns, with an emphasis on downside variations, in comparison to similar Funds.

In each Morningstar Category, 10% of Funds with the lowest measured risk are described as Low Risk, the next 22.5% Below Average, the middle 35% Average, the next 22.5% Above Average, and the top 10% High. Morningstar Risk is measured for up to three time periods (three, five, and 10 years). These separate measures are then weighted and averaged to produce an overall measure for the Fund. Funds with less than three years of performance history are not rated.

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