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Understanding Risk

What is risk

Asset-backed investments present the best opportunity for your savings to grow faster than inflation.  They can also provide income whilst appreciating in value; in return the value of such assets can fall as well as rise.  If your savings fall in value and you ‘live with it’ because you are a longer-term investor, history has shown that the value will usually recover (of course this is not guaranteed). I am not suggesting you invest all your money in high-risk investments, but you should think about the timescale you could be investing for

Time horizon
Generally speaking over the longer term you can take higher risks; for example if an investor is planning to retire in 20 years he might be prepared to accept shorter term volatility for superior longer term returns. It is important to bear in mind that whilst this investor might retire in 20 years it does not necessarily mean that his investment portfolio has to be disinvested, in which case he is actually investing for a longer term than just up to his chosen retirement age

Diversification is the key
As a general guide you should spread your savings to reduce the risk of investing in just one type of asset

Do not panic
Not withstanding a genuine need to withdraw your savings; it is a fundamental issue that you remain invested and ignore shorter term volatility.  If you surrender your savings after a market fall and then wait for it to rise and then reinvest you may ‘miss the boat’

Do not try and second-guess when it is best to invest in the short-term
Research has shown that a large percentage of the overall returns can often be made within a short period of time.  However if you miss out on these ‘rallies’ you could significantly reduce your overall longer term returns

Sovereign Asset Management is a trading style of Sovereign Asset Management (Bristol) LLP, which is authorised & regulated by the Financial Services Authority; registration number 434895. Sovereign Asset Management (Bristol) LLP is registered in England & Wales, registration number OC313334. Any guidance contained within this website is subject to the UK regulatory regime; as such the content is for consumers only based in the UK. The FSA does not regulate all forms of Protection, Business Assurance or Tax Planning. Where this website offers links to any other websites, Sovereign Asset Management (Bristol) LLP have no control over the content and cannot be held responsible for the content or any material transmitted to your computer.