Investments - the risk of taking no risk?

investments the risk of taking no risks

When it comes to savings, risk is often regarded as the enemy – but in order to achieve the level of returns we need and to help us towards our financial goals, we need to get the right balance between risk and return.

By taking no risk, our investments will actually be exposed to inflation risk which will reduce the buying value of our savings.

Risk has many faces and it is important to understand each element so that you can assess how much risk you are willing to take with your investments and to manage the risks which we all face:

1.   Investment risk – In general terms, investment risk is lowest for cash, then bonds, property through to shares which are considered the most risky investment – but there are wide margins of risk within each type of investment. Many funds which you choose to invest in may include all these investment types, but their allocation will give you an indication of the risk. 

2.   Savings risk – It can be hard to estimate how much you need to save to meet your financial goals. We often find that many people underestimate the savings and contributions they need to make in order to meet their financial goals 

3.   Longevity risk – You may be in good health now, but do you know how long you will live for?  There is a risk of underestimating how much income you will need in retirement.

Life expectancy for men aged 65 is 18.8 years, while women at this age could expect to live for an additional 21.2 years according to the Office for National Statistics. This means that a 65-year-old man could expect to live to almost 84 years, while a woman of the same age could expect to reach her 86th birthday.

4.   Inflation risk – Many who are nervous about exposing their savings to investment risk of the markets, may choose to keep their savings in the lowest risk area i.e. cash. But with inflation running at 2.7% (measured by the Consumer Prices Index, April 2017), the real value of cash will fall over time.

Today’s value

Real value in 5 years

Real value in 10 years

£10,000

£8,750

£7,660

£50,000

£44,760

£39,300

 Based on Annual Inflation at 2.7%

5.   Event risk– This risk is hard to anticipate as it relates to something happening which impacts your financial plans, for example ill health or redundancy. We can assist with making sure that you have the necessary protection plans in place, to protect you and your family in the event of loss of income or death. 

6.   Tax risk – Many investments have specific tax rules. These rules may change in the future, so it is important to monitor legislative changes for new opportunities or a withdrawal of any favourable tax rules. 

Whilst the six risk factors above will influence our own view of how much risk we are willing to take, one additional factor to consider is the level of risk we are able to take, known as capacity for loss. For example, a client who is saving into a pension fund with 20 years until retirement has a greater capacity for loss than someone who is five years from retirement – as they have a shorter investment period to recover any losses in the event of any downturn.

So as our investments approach their end dates, generally we have a lower capacity for loss so a more cautious investment approach may become more appropriate.

Whilst all this risk may seem overbearing, we can help you to manage risk and help you towards achieving your financial goals. Our advisers will assess your attitude to risk and capacity for loss by going through a risk tolerance questionnaire with you.

Your willingness to accept risk changes regularly through life.  As such, our advisers provide regular review meetings to help you check that your investments remain on track and help to manage the impact of any risks on your financial plans. 


This article is for information only, based on our understanding of legislation and HM Revenue & Customs practice as at May 2017 and is not to be taken as Financial Advice. Origen are not tax specialists and should you have any concerns with regards to your personal tax situation, we would recommend seeking advice of an accountant.  CA1278    Exp 05/18


[ Date Posted: 16/05/2017 11:42:48 ]