Low risk doesn’t mean no risk – but would-be investors can find the specifics confusing. Mark Norman explains what the varying levels of risk entail and how investors can best balance risk versus return in an evolving market.

Investments can be a lucrative way to maximise returns on your existing assets and increase your financial security – but for some investors, the terms ‘low risk’ and ‘high risk’ can pose a dilemma: Is it best to err on the side of caution and stay in the slow lane, or is it better to throw caution to the wind and increase your risk for potentially greater rewards? 

As there is a level of inherent risk with any investment, the choice should ultimately come down to your objectives and your timescale. What do you hope to generate over the course of the venture and how long does it have to achieve this?

We also have to assess an individual’s capacity for loss. (ie. If the stake were to reduce in value, what is their ability to absorb the losses?)

Levels of financial investment explained

We all seek to make well-informed decisions and enjoy fidelity in our finances, but not everyone is familiar with the varying levels of risk in making a financial investment. How can a would-be financier differentiate between different portfolio options?

While every portfolio is unique, broadly speaking, there are five levels of risk that Matthew Douglas offers its discerning clients: Low risk, balanced growth, medium risk, adventurous, and high risk.

Typically speaking, you’ll enjoy the highest expected yields from a high-risk portfolio, with which you can hope to earn an average 7% annual return after charges over the medium term. This falls to 6% for an adventurous investment, 5% for medium risk, 4% for a balanced growth stake and 3% for a low-risk portfolio.

Calculating investment returns over time

While a difference of around 4% might sound negligible, it’s anything but. Let’s use an example. Say you’re investing £100,000 for 10 years and adding £1,000 per calendar month into your pot; with a high-risk portfolio of assets (assuming favourable market conditions) you could reasonably expect to expand your investment to more than £375,000.

The same initial £100,000 invested into a low-risk portfolio with the same monthly contributions in similar market conditions could yield just under £300,000 – adding £55,000 over the course of the venture to create a final total yield of £275,000. While this is still effectively tripling your earnings, it is on a less pronounced scale.

This is because investments operate on the principle of high risk, high reward – but lower and medium risks are still rewarded, simply with varying and often lesser levels of return.

What determines the specific level of risk?

Essentially, when you select your preferred level of risk, your financial adviser will carefully select assets to invest in, typically a mix of domestic and overseas, that match your specified risk tolerance. So, it is the assets your funds will be invested in that are themselves higher or lower risk rather than the overarching investment itself.

For example, your funds might be invented in the money market for low-risk short-term investments, whereas investing in bonds, property or equities all (typically) entail a higher associated risk factor, respectively.

This is why it’s important to have a broad and varied portfolio, as investing in a variety of different assets will mean that your hard-earned funds aren’t reliant on a singular yield but instead on a dynamic spread of intelligent ventures tailored to your exact needs.

Advice for young investors

My advice to young investors who are seeking to maximise their earnings and build a significant long-term personal investment portfolio is to invest in higher-risk assets over a prolonged period of time. Of course, it’s only prudent that this should include paying into a pension. However, individuals should also review the level of their debts before committing to an investment strategy.

I’m not saying you should expect a guaranteed increase in funds every time you check your balance, as market conditions inevitably will rise and fall in line with economic and inflationary pressures. However, if you can have the steadfastness to invest your funds with sage financial advice from a qualified IFA, you can confidently close the book on your investments for 15, 20, 30 years and trust that the framework is in place to amplify your assets.

Ultimately, you have to play the game and be willing to invest your time as well as your money – and time is often the key variable. The longer you can hold your nerve, the higher the likelihood of a positive long-term outcome that can boost your finances and your prospects. 

To learn more about the varying levels of risk in making a sound financial investment, get in touch with our award-winning team of experts today.