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Over recent years investment markets have become more volatile and less predictable, a good example being the FTSE 100, a measure of the one hundred largest companies based in the United Kingdom, which currently stands over 20% lower than in 1999.
Subsequently, the financial services industry has developed more sophisticated and complicated products in an attempt to provide protection of capital values in falling market conditions and to meet the demands of investors. Consequently, ‘guaranteed’ style investments have become increasingly popular over recent years.
It is, therefore, vitally important that investors fully understand the degree of risk associated with any new investments, in addition to the risks they may already be taking within their existing investment portfolio. An assessment should be undertaken to weigh up the potential rewards against the investment risks involved. Fundamentally, in the desire for better returns, are you completely aware of the risks you’re taking and the possible downsides?
A good starting point when assessing investment risk is to consider what you are actually looking to achieve with your money - is it possible to achieve your goals without taking a high level of investment risk, or are your objectives unrealistic given the risk you’re prepared to take?
Even holding monies on deposit carries its own element of risk. Over the longer term monies on deposit will tend to erode in value because of the effects of inflation. Historically investing in real assets such as equities and property has produced real rates of return significantly higher than deposit-based savings, though capital values for such investment solutions are not guaranteed of course.
If, after careful consideration you are happy to invest monies outside of a deposit based environment, you should then consider the minimum term you are happy to invest for (ensuring you still have adequate funds to meet all foreseeable expenditure). If you aren’t prepared to commit your funds for a period of at least five years, then risk-based investments may not be the right thing for you.
You should also consider how far your investments could fall in value before you begin to feel uncomfortable and what impact falling investment values may have on your financial well-being, both now and in the future. With this established, a discussion with your financial adviser and perhaps completion of a risk profiling questionnaire should then be able to guide you in the right direction. Ultimately, if you have a good understanding of the risks involved and how this can impact upon your investments it is less likely that you will suffer from any unexpected shocks during the period in which you are invested, irrespective of market conditions.
There are numerous product solutions available and it can be a minefield choosing the right one(s) for you. As ever, be mindful that if it appears too good to be true, it usually is, so it is important that you seek professional advice from an independent financial adviser who can examine the whole marketplace and provide an appropriate recommendation based upon your goals, objectives and circumstances.
Investment values can fall as well as rise and you may get back less than you invest. Past performance is not a reliable indicator of future results.
Financial Planning Consultant
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