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.

Risk scores

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

FE is a leading provider of both investment data and performance analysis. They calculate the risk scores by taking at least 18 months of weekly total returns for each Fund , giving more weighting to recent market events and less to historic ones and then measuring the Fund 's volatility, relative to the FTSE 100.

Scores are recalculated weekly on a rolling three year total return basis. Funds which are less volatile in relation to the FTSE 100 have a score below 100 whereas those which are deemed to be more volatile have a score over 100.

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