Investment risk

When you hear people talk about investment risk, they usually mean the risk that the value of your investments may fall as well as rise - this is also known as volatility. But there are other kinds of risk that are equally important. The value of your investments may be eroded by inflation, and the buying power of your investments may be eroded as the price of buying pension can also change. The key to successful investment is balancing these different kinds of risk against each other.

In the earlier part of your career, it may be appropriate to accept a higher level of short-term volatility (or risk) in order to reap the potential reward of higher long-term growth. However, as you approach retirement age you may wish to protect the value of your investments and minimise the risk of them going down in value. When you retire, under current laws you must use some of your investment to buy a pension in the form of an Annuity. In exchange for a lump sum, the annuity company will provide you with an income for the rest of your life. The cost of buying a pension varies. As you approach retirement, you may wish to protect the buying power of your investments.

Your attitude to risk may change over a period and the levels of the different investment risks will also change. This means that you need to review your investments on a regular basis. You may wish to change the mix of your investments from time to time.