Introducing Investments
Risk
How do you feel about 'risk'?
The more attractive the potential rate of return on offer the bigger the risk to the capital that you invest. How much you should invest and what you invest it in will depend on three main factors: your attitude to risk; the level of return you want to achieve; and how long you are prepared to invest your money.
If you are, for example, close to retirement you may well not want to take too many risks. On the other hand, if you have few commitments and are several years away from retiring, you may be prepared to invest in something with a higher risk in the hope of getting a higher return.
If you want to aim for a higher level of return but with a relatively low risk element, then you should be prepared to tie your funds up for some time. Most forms of investment offer greater potential returns for those prepared to invest for the long-term, although this isn't guaranteed.
Broadly speaking, we may place most forms of savings and investments into a risk spectrum with derivatives at the speculative end and Gilts and National Savings & Investments at the very low risk end.
| Highest Risk |
| Derivatives |
| Penny Shares |
| High Risk |
| Emerging Market Funds |
| Blue Chip Shares |
| Medium - High Risk |
| Collective Equity Funds (investment trusts, unit trusts and open-ended investment companies [OEICs]) |
| High-Income Bonds |
| Medium Risk |
| With-profits Bonds |
| Corporate Bond Funds |
| Low Risk |
| Guaranteed Income Bonds |
| Permanent Interest Bearing Shares (PIBS) / Perpetual Savings Bonds (PSBs) |
| Very Low Risk |
| Bank/Building Society Accounts |
| Gilts/National Savings & Investments |
This table is intended purely as a general guide to the relative risks of different forms of investment. In practice, individual investments, even of the same basic type, can vary widely in terms of their levels of risk and no reliance should be placed on the gradings shown.
Review your financial position
Are you making the most of your money? Re-evaluate your savings and investments. Are your short-term savings trapped in a low interest account? Free them to earn you more! Are you taking advantage of all the tax breaks available to you? Do you want to broaden your investment horizons but aren't sure how to go about it? Are you making proper provision for the future through your pension plans?
Take a long, careful look at how your existing investments are performing. Are you happy that you are getting the best possible return from them? Do they fit in with your current "risk profile" - should you, if you are getting closer to retirement, be thinking about reducing the level of risk in your portfolio of investments or should you actually be thinking about taking a few more risks if you have plenty of time in which to build up an investment portfolio?
Remember, you get no reward for loyalty to a financial institution offering a poor return!
Look for savings accounts with rates better than the rate of inflation otherwise the real value of your money won't even stand still. Remember, if you are a taxpayer, to check the net rate of interest that you will receive and don't forget that higher-rate taxpayers will also have to pay an extra 20% on the gross interest.
You may have been canny enough to build up investments in Personal Equity Plans before they were replaced by Individual Savings Accounts. You can still move your funds around within the PEP wrapper to look for a better return.
In fact, there is a lot you can do to shelter your investments from tax and there are plenty of tax breaks available. You should consider making full use of any tax savings that are open to you. However, you should never invest solely because of the tax advantages an investment scheme confers. Nevertheless, there is no point overpaying tax, you won't get a better service from the government if you do!
Introduction
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