MSE’s Academy of Money
MSE’s Academy of Money

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MSE’s Academy of Money

16 Investment strategies: how to manage your risk

The image is a photograph of a young woman sitting at a table. She is on her mobile phone, listening. She is making taking notes as she listens. In front of the women is an open laptop.
Figure 17 Attention to detail is required when monitoring your investment risks

We have to be careful here as we are not giving investment advice, which is a regulated activity. So we won’t be telling you where to put your money. And as we have said before, remember that the value of your investments can go up and down, while past performance is not always an indicator of future returns.

But there are some key principles to help you make those decisions:

  • Investing is for the long term, as you may well need the time to ride out any periods where your investment falls in value. Don’t expect to make short-term gains or you could well be disappointed.
  • Don’t lose too much sleep if the value of your investments fall early on. The only prices that matter are the one you buy at and the one you sell at, and there may be time for markets or your investment to recover. There is a danger in selling at the bottom of the market which only serves to crystallise any losses.
  • Be careful about putting all your eggs in one basket, as the old saying goes. That is one of the reasons why investment funds are popular, as you are not limited to one company’s shares. It’s perfectly fine to have a mix of investments.
  • Consider the tax benefits of investing via a stocks and shares ISA – though remember the limit on new money placed into all types of ISAs is £20,000 per tax year (as of 2020/21). With a stocks and shares ISA you don’t pay tax on your returns, but you don’t necessarily pay tax anyway if your returns are below the dividend or capital gains allowances, so for smaller investors they aren’t as beneficial. There’s lots more help on this in MSE’s stocks and shares ISAs guide [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] .

Activity 8 Age-adjusting your fund choice

Timing: Allow approximately 5 minutes for this activity

One common recommendation is to select funds with low risk and price volatility as you get older! What is the reason for this?

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Answer

If you are young and can invest for the long term, there is scope to invest in funds with greater risk and, as a result greater potential price volatility than ‘safer’ funds, because if the fund loses value there is more time to make it back. But as you get older – and particularly as you approach the need to draw on your investments in retirement – then you may need greater certainty about the value of, and returns from your investments. So investing in shares (equities) when young and in bonds (‘fixed-interest’) when approaching retirement is viewed by some as good sense (though we are not making that recommendation ourselves). Yet as is mentioned throughout, there is no such thing as a sure thing when it comes to investing, so whatever you do you will be taking some risk.

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