Look it up in the dictionary and you’ll see that risk is described as a situation involving 'exposure to danger'. Not the most inviting of propositions. But when looking at risk in terms of investing, fear needn’t be a factor. Truly understanding risk as a concept is simply a cornerstone of successful long-term investment management.
|Portfolio composition||Best year return||Worst year fall||Worst 12 months|
|Low risk||100% 0–5 Year Gilts||1998 +11.4%||2013 -0.8%||-0.9|
|Medium risk||50% Gilts, 35% FTSE All Share and 15% MSCI All Share ex UK||1997 +18.6%||2008 -8.3%||-14.5%|
|High risk||30% FTSE All Share and & 70% MSCI All Share ex UK||1999 +30.1%||2002 -26.0%||-31.1%|
The question is what would it mean for your if your investment fell in value? The above table gives some idea of what has happened in the past.
Give some thought to how it would affect your plans and your standard of living.
If you have flexibility about when you need your money, you can leave the money to recover from a downturn. How long that takes has varied widely from a few months to a few years, and will also depend on how it is invested. This is a very good way of managing risk, but requires the financial and psychological ability to delay encashing your investment.
At Nutmeg we show you what the downside may look like so that you can really think about what that would mean for you.