Managing investment risk

Authored on
20 Feb 2023



Risk and the gender investment gap

On average women are more risk-averse than men, and this characteristic may help explain the gender investment gap. The Money Matters research report found that 71% of women would rather not take risks but have less rewards in future. And this statistic seems to be borne out in investing behaviours: far fewer women than men invest, and those that do tend to invest in ‘safer’ options that are less likely to lose money, but also generally bring lower returns.

Being risk-averse isn’t necessarily a problem and can be incredibly sensible in certain situations. But with investing, it’s important to get some perspective on risk before deciding what to do. Because without risk there is no reward, and since you’re reading this it’s safe to assume that you’re looking to reap some rewards.

Risk knowledge is investing power

There’s no point sugar-coating it – with any investment, there’s a risk of losing money. Markets can go down as well as up, so can the value of your investments and you could end up taking out less than you put in. Whereas with cash savings, because they aren’t affected by the market ups and downs, you’re almost guaranteed to get back what you put in.

While the risks of investing are real and important to understand, don’t forget the rewards of investing. Returns on investments are a real thing and have historically beaten cash returns time and again. Although past performance can’t predict future returns, over the long term (five-plus years) the risk of investing is more likely to be paid off with greater rewards than your (almost) risk-free cash savings can offer.

Being risk-aware can empower you and ultimately make you a better investor. That’s why you should always know the risks and think carefully about them before making your investment decisions. There’s a key role for your provider here: the investing risks should be made clear, not hidden from view.

With AJ Bell and Dodl, you’ll always have the risks pointed out to you, then you can decide if you’re comfortable with the risks and how to manage them. But if you’re ever unsure about the risks involved or need advice on this, you should talk to a qualified financial adviser. Check out MoneyHelper for more info on how to find one.

How can you manage investment risk?

The risk of investing isn’t something entirely out of your control. You have ways you can manage your risk and keep it within comfortable levels. That’s where we can help! Here are some quick tips for risk portfolio management.

Risk and return stick together

Typically, the higher the potential return of an investment, the higher your risk of losing money on it. The relationship between risk and return is a helpful rule of thumb, and one to keep in mind when choosing your investments.

Towards the lower risk/return end of the spectrum are cash and bonds, which offer some protection from the direction the market is blowing. But that protection works both ways – you may miss out on the highs as well as the lows. Shares on the other hand sit further along that spectrum, but though it can be a bumpier ride, there’s potential for greater returns.

Always carry out your own research when choosing your investments – read key details and understand the investment’s performance – though this isn’t an exact guide to its future performance. The more you understand your investment and its risks, the more in control of your investing journey you’ll feel.

Get to know your risk appetite

This can be a powerful tool in your investing toolbox! Nothing too deep, promise, just think about how much risk you’re comfortable taking – this is often called your ‘risk appetite’ in the investing world.

Perhaps you’d prefer a steadier ride with fewer dips along the way, and are happy to forgo potentially higher long-term returns for this? Or maybe you’re willing to go through more ups and downs if that means greater returns on your investment several years down the line? Or you could be anything in between.

There are no wrong answers, it’s just what feels right to you. Knowing this can make choosing investments and building your portfolio a lot easier. Again though, if you’re not sure how you feel about risk, consider speaking to a qualified financial adviser who can help you figure this out.

Have you got the time?

“Time in the market, not timing the market” is a turn of phrase thrown about a lot in the investing world. All it means is that those who buy and hold investments over an extended period tend to end up better off than those who attempt to time the perfect points to buy and sell.  There’s far less risk in it.

In fact the length of time you have to invest for can help you decide how much risk to take with your investments. Typically, the longer you can invest for, the more risk you can afford to take. That’s why many people choose to invest in share-heavy portfolios for their pension when they have decades until they retire but may shift this to more conservative investments, like cash and bonds, when they’re nearing their retirement age.

Diversifying investment risk

By having a good spread of investment types, themes, sectors and regions in your investment portfolio, you’re not risking losing all your money when one of them takes a hit – so you’re reducing your overall risk, without sacrificing on returns. This risk-reducing strategy is called diversification, and it’s essentially what funds with a mix of different types of investments (‘multi-asset’ funds) aim to achieve.

If you want to spread your risk the easy way, opt for a multi-asset fund that matches your risk appetite – they come handily labelled with a risk level, ready for you to ‘pick off the shelf’. There are lots of these types of funds, including some run by AJ Bell.

Investing in multi-asset funds doesn’t stop you from selecting individual shares, theme-specific funds and/or bonds for your portfolio, if you want to. Just remember the importance of diversification in reducing your risk when choosing them.

Yes, investing involves risk…

…but risk shouldn’t be avoided at all costs! The point is that investment returns come with risk, and if you’re always avoiding the risk, you’ll always be avoiding the returns. Knowing about risk and how to manage it can help you make your investment calls with confidence.

Finally, nothing in this article should be taken as advice. Money Matters doesn’t provide advice – so if you feel unsure about anything, it’s best to speak to a qualified and regulated financial adviser.

These articles are for information purposes only and are not a personal recommendation or advice.