Investing is a risky business. Having said that, it’s important to understand risk, its enablers, and its modifiers. When you’ve done so, you’ll be able to make a better value judgment about whether you are prepared to accept risk and, if so, to what degree.
If you are investing for your retirement, the concept of risk takes on even more significance. The state pension alone is highly unlikely to give you the income you need, and even any workplace pensions you have may not allow you to enjoy the sort of retirement lifestyle to which you aspire. If you have any disposable income left over once you’ve paid your bills and made your pension contributions, investing it is probably the best way to ensure you’ll have the income you need come retirement.
If you are hoping to retire early, the risk element comes even more to the fore. If you were born post the 5th of April 1960, you won’t be able to draw your state pension until you reach 67, or eventually 68, so it puts even more pressure on the risk decision-making process.
Putting risk into context
Risk does, however, have to be viewed in context. In the UK, if you have a SIPP or a workplace pension, those too are subject to risk. At the moment you have little choice as to what assets your workplace pension carries, although that could change in the near future. A SIPP, however, currently has much more asset flexibility than a workplace pension.
If you are totally risk averse, you might think about putting your money into a savings account or bonds. The problem with savings accounts, of course, is the low-interest rate, and your savings will actually lose money in real terms because of inflation. Bonds, too, whether corporate or government, don’t offer great interest. It’s the same old story. The lower the risk, the lower the interest.
Don’t forget, too, that you will also have to pay income tax on your pension income (apart from the first 25% of any private pension pots) unless you opt for an ISA.
Yes, there is a certain amount of risk with an ISA, but you can choose how much risk you are prepared to take. A stocks and shares ISA also gives you more flexibility when it comes to asset choice.
The Risk Associated with ISAs
If you invest in a cash ISA, there is little risk. Unfortunately, cash ISAs are rather like ordinary savings accounts – they pay low interest, and the money invested is likely to lose value in real terms. But like any ISA, a cash ISA does have the benefit of being a tax wrapper, and that means all withdrawals are tax-free.
In terms of investing for your retirement, a stocks and shares ISA could be your best bet and you can choose from a low, medium, or high-risk portfolio.
Risk Mitigation
There are two ways of mitigating risk when you invest. The first way is through diversification. Simply put, it means not putting all your eggs in one basket. By investing in different asset classes, and different companies operating in different market sectors, you are spreading the risk.
The second way of mitigating risk is to be prepared to invest long-term. Investing long-term means not being forced to take your money out when the stock markets have dropped. These two methodologies considerably reduce the risk element.
Speculate to Accumulate
There is no doubt that you have to speculate to accumulate. While the stock market is a place where you can make money, you really have to know what you are doing. But, if you don’t, it doesn’t mean that you shouldn’t invest. You can take out stocks and shares ISA and let a professional adviser recommend which one would suit you best in terms of both risk and reward.
Stocks and shares ISAs cover all the bases when it comes to risk and retirement. You get diversification, and if you invest long-term, you can let your account ride out market lows. Your fund will be professionally managed, and if your advisor is FCA registered, up to £85,000 of your funds will be guaranteed by the Financial Services Compensation Fund (FSCS).
