Go mad and live a little

Nic Cicutti discusses the pains and pleasures of taking risks

Risk. This is a word which appears again and again in all discussions about investment, a word which encapsulates the very essence of any fund management strategy or financial product design.

Generally, the degree of risk you are prepared to accept for your money will determine the return you receive from it. But here is a conundrum: who defines what is risky and what is not?

Clearly, what you or I accept is a hazardous - even foolhardy - financial strategy will be seen by another person as the quintessence of safe-as- hands money management.

It is virtually impossible to determine for everyone and evermore what is or is not an acceptable level of risk. But we can begin to discuss a few of the principles that should govern our attitude to this subject. Thereafter, we can examine some of the most common products and place them in some kind of order according to the risk they subject to cash placed with them.

The first point to understand is that theoretically, there is no investment which is 100 per cent free of risk. Moreover, the word itself is elastic and can have different meanings.

For example, one understanding of risk is where even a nice, seemingly safe building society could go belly-up, leaving you to claim compensation worth just 90 per cent of your deposit, up to a pounds 20,000 maximum. Another understanding of risk is that the interest paid on your deposit is less than inflation at that point in time.

The second point is that our willingness to accept financial risk can change according to many circumstances, including age, for instance. Younger investors can afford to take a more long-term view if equity prices fall. Older investors, particularly those close to retirement, need to protect their capital.

Third, although the safest form of investment may still be that mythical building society account, better performance has tended to come from equities.

That is not to say that share prices move up in an uninterrupted curve. Volatility, as seen by yesterday's fall in the FTSE 100 share index, will always remain with us. The key then is how to average out the cost of investing.

Take a fund in which you invest pounds 1,000 every year for 10 years. If the value of the fund increases by a set amount every year, you will show a certain return. By comparison, if you invested in a far more volatile fund, which experiences a range of ups and downs, you might feel you were likely to be investing in a loser.

Actually, that is not necessarily certain. The pounds 1,000 you invest in "bad" years will buy you more shares, units or whatever the measure of investment is. In an upturn, those "cheap" units will grow faster in relative terms and, because you have more of them, your gains will be greater.

A fourth point to consider is the effect that interest rate movements can have on the value of your capital.

Say you buy a fixed-interest security, such as a corporate bond. The bond cost pounds 100 and has an income of pounds 10, or 10 per cent of the sum invested. If interest rates were to fall to 8 per cent, the value of the investment grows. This is because the corporate bond's income, which may previously have been unexceptional, suddenly becomes more attractive. More people will want to buy it, pushing prices up.

If the income of pounds 10 is deemed to be equal to the new interest rate of 8 per cent, the bond's price may have to rise to pounds 125. This seesaw also implies risk in the market. If you invest at the wrong time, a rise in interest rates can have the opposite effect on the value of your corporate bond.

Either way, what also becomes clear is that, unless interest rate movements begin to gyrate madly, the level of risk is smaller with fixed-interest securities than with straightforward equity investments.

Which takes us to the next point about understanding risk. As our illustration at the bottom of this story shows, there are different levels of risk depending on the type of financial product one is considering.

This table is useful if you speak to an independent financial adviser who will want to recommend a product to you. But the important point to remember is that risk is not the only basis for investing. The suitability of a product is as important as the issue of whether capital erosion may take place.

One key aspect of any understanding of risk is that investments do not all present the same risks at the same time. While UK share prices have rocketed ahead in the past 18 months, Japanese equities have languished.

Investing in just one stock market might involve greater risks than necessary for little reward.

The final part of understanding risk is that it is something to savour and even enjoy in moderation. If you can afford it, take risks with some of your money, as long as you are prepared to lose the lot.

Towry Law, a firm of independent financial advisers, is offering copies of its "Principles of Investing" to readers of The Independent. Write to Towry Law, Baylis House, Stoke Poges Lane, Slough, Berks, SL1 3PB or call 0345 889933.

Arts and Entertainment
Armstrong, left, and Bain's writing credits include Peep Show, Fresh Meat, and The Old Guys
TVThe pair have presented their view of 21st-century foibles in shows such as Peep Show and Fresh Meat
Arts and Entertainment
Keys to success: Andrew and Julian Lloyd Webber
arts + entsMrs Bach had too many kids to write the great man's music, says Julian Lloyd Webber
footballMan City manager would have loved to have signed Argentine
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
Hand out press photograph/film still from the movie Mad Max Fury Road (Downloaded from the Warner Bro's media site/Jasin Boland/© 2014 Warner Bros. Entertainment Inc.)
films'You have to try everything and it’s all a process of elimination, but ultimately you find your path'
Arts and Entertainment
Imelda Staunton as Dolores Umbridge in the Harry Potter films

New essay by JK Rowling went live on Pottermore site on Friday


Top Gear presenter is no stranger to foot-in-mouth controversy

Russia Today’s new UK channel began broadcasting yesterday. Discussions so far have included why Britons see Russia as ‘the bad guy’

New UK station Russia Today gives a very bizarre view of Britain

Arts and Entertainment
Keira Knightley and Benedict Cumberbatch at the premiere of The Imitation Game at the BFI London Film Festival
filmsKeira Knightley tried to miss The Imitation Game premiere to watch Bake Off
Enner Valencia
footballStriker has enjoyed a rapid rise to fame via winning the title with ‘The Blue Ballet’ in Ecuador
Arts and Entertainment
A top literary agent has compared online giant Amazon to Isis
arts + entsAndrew Wylie has pulled no punches in criticism of Amazon
Arts and Entertainment
Charlie Sheen said he would

Finacial products from our partners
Property search

How to cut the cost of car insurance: A five-step guide to getting a better deal

Premiums are on the rise again but motorists don't have to take a back seat on the price of their cover, says Rob Griffin

Shareholders can hold a company to account

Ever wanted to hold to account a company you invest in, but didn't know how to go about doing it? Simon Read shows how individual shareholders can make their voices heard

How shops make you spend: The subtle art of the savvy retailer revealed

'A third extra for free', gift sets, recommendations for a present for Grandpa - just some ways to make you pay more than you intended

Many people unwittingly end up invested in sectors at odds with their ethical beliefs.

Simon Read: It is time to think again about ethical money

The ethical investment industry is giving itself a makeover, but the problem seems to lie more with getting its message and its methods into the mainstream

Going down the wrong road: parking fines are
nudging people into debt difficulties

Charges related to car parking rising and leading to serious money woes

Going down the wrong road: parking fines are nudging people into debt difficulties

Stacks of income: Drax is among the companies in Neil Woodford’s portfolio that he believes will pay strong dividends

Mark Dampier: Woodford’s young companies could be the stars of the future

Stacks of income: Drax is among the companies in Neil Woodford’s portfolio that he believes will pay strong dividends

A trader works on the floor of the New York Stock Exchange

Simon Read: The markets might not be calm but you should be

Don't panic, it’s a wise idea to check investments regularly to ensure they are on target for your hoped-for returns

Only six per cent of the 13,000 new homes bought during Help to Buy’s first nine months were in London

Money Insider: Help to Buy must be boosted by building

With little or no wage growth being seen in the UK, increasing house-price inflation could see the number of first-time buyers slide further, unless there’s a new accelerated house building programme

House buyers can take their pick of more than 3,500 home loans, the most available since the financial crisis

Simon Read: Those cheap home loans may be built on shaky foundations

You should ignore the headline offers and trickery and work out the total cost of borrowing under different deals

Denise Leigh, who appeared in a production
of Rigoletto with Alan Opie, was left without an essential service

The opera singer, the broadband delay and why customers aren’t divas if they expect a good service

Denise Leigh, who appeared in a production of Rigoletto with Alan Opie, was left without an essential service

Problem debt adds £8bn cost to the economy

A charity has calculated the cost to us all of unmanageable debt – from lost productivity to the extra demands on the NHS

Payday loan stores are to face tougher regulations after moves proposed by the Financial Conduct Authority (FCA) call on more responsible lending

Calls for payday lenders to sign up to an officially recognised price comparison site

The regulators are at last tackling the high-profile payday lenders, but they appear to be ignoring the growing problem of internet loan firms

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    The benefits of Recruitment at SThree...

    £18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

    Trainee Recruitment Consultants

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    Finance Assistant - Part time - 9 month FTC

    £20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

    Marketing Manager

    £40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

    Day In a Page

    Bryan Adams' heartstopping images of wounded British soldiers to go on show at Somerset House

    Bryan Adams' images of wounded soldiers

    Taken over the course of four years, Adams' portraits are an astonishing document of the aftermath of war
    The drugs revolution starts now as MPs agree its high time for change

    The drugs revolution starts now as MPs agree its high time for change

    Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
    The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

    Gotcha! The camera is turned on tabloid editors

    Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
    Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

    Fall of the Berlin Wall

    It was thanks to Gorbachev that this symbol of division fell
    Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

    What makes ouija boards and demon dolls scary?

    Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
    A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

    Rose Rouse's safari in modern Britain

    Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
    Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

    'My world of no smell and odd tastes'

    A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

    Matt Parker is proud of his square roots

    The "stand-up mathematician" is using comedy nights to preach maths to big audiences
    Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

    Paul Scholes column

    Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
    Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

    Frank Warren column

    Call me an old git, but I just can't see that there's a place for women’s boxing
    Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

    Adrian Heath's American dream...

    Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
    Simon Hart: Manchester City will rise again but they need to change their attitude

    Manchester City will rise again but they need to change their attitude

    Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
    Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

    A Syrian general speaks

    A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities