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.

Start your day with The Independent, sign up for daily news emails
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
tv
Arts and Entertainment
Lena Headey as Cersei Lannister
TVSPOILER ALERT: It's all coming together as series returns to form
Sport
footballShirt then goes on sale on Gumtree
Have you tried new the Independent Digital Edition apps?
Voices
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010
music
Arts and Entertainment
Twin Peaks stars Joan Chen, Michael Ontkean, Kyle Maclachlan and Piper Laurie
tvName confirmed for third series
Sport
Cameron Jerome
footballCanaries beat Boro to gain promotion to the Premier League
Arts and Entertainment
art
Finacial products from our partners
Property search
Up and away: rates will rise but your mortgage won't escape its moorings with a long-term fix

Is a 10 year mortgage deal a fix too far?

A cut-price deal for a decade-long home loan - where's the problem? Only, says Simon Read, that circumstances can change and it won't be easy to get out
In a surprise move the Tories have decided against putting a career politician into the job. Instead they’ve handed the responsibility to campaigner Ros Altmann

New pensions minister has massive job on her hands

The Tories have appointed campaigner Ros Altmann to the post

Promises, promises: David Cameron talks to staff at Asda's head office in Leeds today

General Election 2015: How you vote next week could affect your finances

Rival party pledges could shrink your savings or grow your nest egg
Logos for the 'Big Six'; energy companies (top row from left) British Gas, EDF, RWE npower, (bottom row from left) SSE, E.ON and ScottishPower

Winter heating underpayment brings summer pain

One reader’s monthly direct debit charge has been increased by 62 per cent

Almost 15,000 people died last winter through living in cold homes that they couldn’t afford to heat

Social tenants locked into energy tariff for 40 years

Many Londoners who live in social housing estates are not allowed to switch because their landlord has ‘locked’ them in to buying from one supplier

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The firm’s revenues slumped by a third to £217 million in a disastrous 2014

Wonga results could get even worse this year, chief admits

The firm’s revenues slumped by a third to £217 million in 2014

The cost of a buildings policy has dropped by 10.1 per cent over the year, with the cost of a contents policy falling by 8.2 per cent

Simon Read: Mild winter cuts the cost of home insurance

The average quote for a buildings and contents policy has fallen by 3.6 per cent

Don't count your retirement money yet: employers will stop receiving a pension rebate next year and their staff may lose out

Defined-benefit pension schemes: Rebate change in 2016 may leave you out of pocket

Employees in defined-benefit schemes are held up as the lucky ones, but the state pension scheme will be overhauled in April 2016
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Software Developer / C# Developer

    £40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

    Neil Pavier: Management Accountant

    £45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

    Sheridan Maine: Commercial Accountant

    £45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

    Laura Norton: Project Accountant

    £50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

    Day In a Page

    Abuse - and the hell that came afterwards

    Abuse - and the hell that follows

    James Rhodes on the extraordinary legal battle to publish his memoir
    Why we need a 'tranquility map' of England, according to campaigners

    It's oh so quiet!

    The case for a 'tranquility map' of England
    'Timeless fashion': It may be a paradox, but the industry loves it

    'Timeless fashion'

    It may be a paradox, but the industry loves it
    If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

    Could have done with Osama bin Laden staying alive?

    Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
    New exhibition celebrates the evolution of swimwear

    Evolution of swimwear

    From bathing dresses in the twenties to modern bikinis
    Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

    Sun, sex and an anthropological study

    One academic’s summer of hell in Magaluf
    From Shakespeare to Rising Damp... to Vicious

    Frances de la Tour's 50-year triumph

    'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
    'That Whitsun, I was late getting away...'

    Ian McMillan on the Whitsun Weddings

    This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
    Kathryn Williams explores the works and influences of Sylvia Plath in a new light

    Songs from the bell jar

    Kathryn Williams explores the works and influences of Sylvia Plath
    How one man's day in high heels showed him that Cannes must change its 'no flats' policy

    One man's day in high heels

    ...showed him that Cannes must change its 'flats' policy
    Is a quiet crusade to reform executive pay bearing fruit?

    Is a quiet crusade to reform executive pay bearing fruit?

    Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
    The King David Hotel gives precious work to Palestinians - unless peace talks are on

    King David Hotel: Palestinians not included

    The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
    More people moving from Australia to New Zealand than in the other direction for first time in 24 years

    End of the Aussie brain drain

    More people moving from Australia to New Zealand than in the other direction for first time in 24 years
    Meditation is touted as a cure for mental instability but can it actually be bad for you?

    Can meditation be bad for you?

    Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
    Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

    Australia's first-ever Eurovision entrant

    Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine