Page 46 - DIY Investor Magazine | Issue 37

Apr 2023 46 DIY Investor Magazine · Investors have huge choice and must consider what their attitude to risk is and how they might want to diversify their investments. Risk profiled funds allow investors to match their individual attitudes to investment goals – writes Christian Leeming. RISK VERSUS REWARD Before setting goals and devising an investment strategy, you must first establish how much risk you are willing to take. This can depend on: • Your capacity to recover from losses should markets fall • The length of time you wish to be invested • Which investment products you should be invested in • Whether cash is more suitable for you • Who else relies on your investment goals Some riskier, or more volatile investment products can offer greater returns over time, but the reverse is also true, you could potentially suffer greater losses; you must be aware of that before you select your investments. HOW CAN MY ATTITUDE TO RISK BE ASSESSED? Online tools or questionnaires can help identify your attitude to risk and then recommend the most appropriate investments to match your circumstances and needs. Typically, categories can range from (1) being risk averse to (10) being highly adventurous (see below). Always remember, taking on more risk can potentially lead to higher rewards but also potentially higher losses. HOW CAN INVESTMENTS BE MATCHED TO MY OWN ATTITUDE TO RISK? Funds are independently assessed according to a number of factors including what investments they hold, the investment team behind them and how they have performed, to determine their risk profile. Risk profiles are based on historic data and should not be solely relied upon when making an investment decision. One widely used measurement for risk is volatility – i.e. how sharply and frequently an investment price moves up or down over a certain period. Someone who is risk averse or who has a low-risk score for example, will be matched with an investment with a low expected volatility. WHAT ARE THE DIFFERENT TYPES OF RISK PROFILED FUNDS? Risk targeted funds are designed to not deviate from specific risk parameters, usually measured by volatility*, and to keep the same risk profile. These funds are investor goal driven, which means they can be more closely aligned with an individual’s financial plan. Risk rated funds typically have growth or income objectives rather than being specifically investor goal driven. Their risk profile is assessed at one point in time and may change. TOP TIPS: • Measuring your attitude to risk can help you match with the right investment strategy • By speaking to a financial adviser or using an online tool, you can discover your ‘attitude to risk’ • Risk profiled funds help match the right fund to your attitude to risk *The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment. SAVER > INVESTOR: A SIMPLE GUIDE TO RISK PROFILED FUNDS A risk profiled fund can be matched to an investor’s attitude to risk; there are funds available to match each category.