THE DIFFERENT LEVELS OF RISK EXPLAINED


A FEW BASICS



  1. Apart from any no risk investments, investment inevitably involves risk. But no matter what the level of risk, there should always be a degree of control through balance, i.e. a mixture of cash, fixed interest and asset-backed holdings (equities) like unit trusts.

    A unit trust is a 'collective' investment. Instead of holding a few individual shares, collective investment spreads an investor's money. So you would own a tiny proportion of a fund which might hold over 100 individual shares. Safety in numbers. So both balance and 'collective' are important.

  2. You should only consider risk investments if you are prepared to take a five year view.

  3. Stock markets go down as well as up. So whilst, "the higher the risk the higher the reward" is often cited, the reverse applies too, i.e. the greater the risk the greater the potential loss.

  4. Both fixed interest and equity holdings can vary between low and high risk.

  5. Risk and volatility go hand in hand. If the performance of your investment is so volatile as to cause you sleepless nights, the degree of risk is too high for you - HELP!?

NO RISK

It is difficult to find 'no risk' investments. Government securities such as Index-linked National Savings Certificates / Gilts are probably the nearest. But please remember, there is always the possibility of negative inflation. Also, choose your Government with care. There is a difference between the U.K. and the U.S.A. and Mozambiscuit and Venezlonga ...!

Even cash is only as safe as the Institution holding your deposit. (And banks have crashed. Some of you will remember BCCI.)

Additionally, even with 'no risk' investments, you must take inflation into account. This is because if your return proves to be less than the rate of inflation, you have lost purchasing power. So even with 'no risk' investments, you have to take inflation into account.

LOW RISK

By combining both balance and the use of collective investments, your capital should not be at risk unless there is a catastrophe. You should expect returns to be better than cash and with no sleepless nights even though values will go both up and down. That is why we talk about a five year horizon.

HIGHER RISK

The value of your investments will be subject to volatility but the ultimate returns should be better than medium or low risk investments. And, if you stick with balance and 'collective' investments, your capital should (barring catastrophes) be secure. But, because of the higher risk, the five year horizon should, in our opinion, be extended.

MEDIUM RISK

Anywhere between LOW and HIGHER.

NOTE. Porter Brown does not become involved with High Risk investments such as individual shares (remember GEC/Marconi?), commodities, 'off plan' property developments, etc. Having said that, for medium and higher risk investors, who are perhaps looking for added 'spice', we see nothing wrong with having, say, five percent of the investment capital in a high risk area.

Return to INVESTMENT PAGE