Investment Risk and Reward Explained

Investments can be a fantastic way to make your pensions or savings work harder for you and can be great addition to your saving strategy.

However, when it comes to investments, there’s always a level of risk involved. Whether you’re eyeing a Stocks & Shares ISA, a General Investment Account, or a drawdown plan for your pension, it’s crucial to grasp the level of risk involved before diving in.

Our financial advisers are here to recommend the portfolio that best suits your needs, making sure you’re comfortable with the risks and that your investment aligns with your goals and objectives. We can recommend portfolios across a range of different risk levels using multi-asset funds that offer investment diversity, limiting your exposure to market shocks and offering access to a range of different assets.

Rest assured, your adviser will recommend what’s best for you, considering your risk tolerance and financial objectives. Think of them as your financial friends, always looking out for your interests while aiming for growth of your funds. The easiest way to think of risk and reward is that the higher reward often comes with greater risk, just like climbing a mountain for a better view.

Now, Let’s Break Down a Couple of Key Risk & Reward Concepts

Risk

The chance your investment could decrease in value.

Reward

The potential return or profit gained from an investment

Attitude to Risk

This is how comfortable you are with risk in your investments. For example, you may consider yourself to be an adventurous investor. If this is you, you might be willing to take the risk of greater losses in favour of higher growth potential for your funds.

Alternatively, you may be cautious, happier to aim for lower potential growth in return for a less volatile investment experience.

Capacity for Loss

Capacity for loss refers to the amount of financial risk you can afford to take without it having a detrimental impact on your day to-day lifestyle or long-term financial wellbeing.

Think of it as a financial buffer your safety net. Even if your investments perform poorly, having a strong capacity for loss means you won’t be forced to change your standard of living or compromise future goals like retirement or funding your
children’s education.

Remember, your attitude to risk and reward and capacity for loss might not always line up. You might be able to handle a loss but prefer to play it safe. That’s where your advisor steps in, using all the information you’ve given to tailor their recommendation just for you.

So, speak to us today to find out what strategy could help you unlock the potential in your savings and make them work harder for you. We make risk and reward manageable.

Risk and Reward: Understand Investment Risk

Understanding the different risk and reward associated with investing is essential when considering your options and assessing risk tolerance. Every investment carries an element of risk and knowing what the possibilities are can help you stay level and confident in your financial decisions.

Common types of investment risk include:

Market Risk – The value can fluctuate due to wider movements across the markets such as interest rate changes and sectors within the economy can cause financial rise and falls.
Inflation Risk – Inflation can chip away at your return potential and if your investments don’t outrun inflation then you may end up losing value.
Credit Risk – An issuer of a bond/loan may fail to make interest or principal payments especially in corporate/high-yield bonds

It’s important to be aware of factors that may impact your returns and our expert financial advisors can help you in selecting investments to suit your goals and risk tolerance.

Important information

When investing, your capital is at risk. Past performance is not a guide to future performance.

What Does Reward Look Like in Investments?

When we talk about “reward” in the risk and reward equation, we’re referring to the potential financial gain you might receive from your investments.

This return can come in several different forms, and the type of investment you choose will determine the nature and timing of your rewards.

Capital Growth – The increase in value of an asset over time e.g. you buy shares at £100 and then later sell for £150, your capital gain would be £50.

Dividend Income – Some companies pay a portion of their profits to shareholders in dividends. Regular payout can be a consistent form of income for those retiring and seeking cash flow.

Interest Payments – Fixed-income investments such as government bonds pay interest over a set period. They tend to be more reliable than stocks.

Total Return – A combination of capital growth and income. The total return value shows the full picture of your investment earnings, allowing easier assessment of your risk and reward strategy.

By working with our financial advisers, you can assess your risk profile and explore solutions and portfolios that align with your goals and income preferences. At My Pension Expert, we personalise investment strategies that aim to balance potential growth with a clear understanding of the risks involved.

Our approach helps you make informed decisions and stay confident about your financial future – supporting a retirement you can truly be proud of.

Frequently Asked Questions

Need another question answering? Get in touch with us today.

Are higher risks bad when investing?

Not necessarily. Higher-risk investments often offer greater potential returns, especially over the long term. However, they also come with increased chances of loss.

How do I know what level of investment risk is right for me?

Determining your ideal level of risk involves assessing your risk tolerance and your capacity for loss based on your circumstances. Our financial advisors can help with this.

Can I get good returns without taking on a lot of risk?

While it’s possible to earn modest returns through lower-risk investments like bonds or savings accounts, these typically offer limited growth.

How can I balance risk and reward in my portfolio?

Balancing risk and reward involves diversification, understanding your financial goals, and reviewing your investments regularly, with our financial advisor’s support.