Risk explained

What is risk?

Risk is the chance that your savings or investments won’t grow as well as you hoped, or needed, to provide you with the level of income you need when you retire. If your investments perform particularly badly, you could get back less than you paid in.

How much risk should you take?

The answer to this question is always a very individual one. Ideally we would all like to take no risk and enjoy great returns, but that’s not possible. So in a very broad sense the answer depends on how comfortable you are with the thought that you could lose some money. But there are other factors that will influence how much risk you’ll be exposed to, including:

• How long you’re investing for – it makes sense that the longer your funds are invested, the less affected you will be by short term stock market fluctuations
• How diversified your savings are – if you have the bulk of your savings in a relatively safe place such as a bank savings account, you may be confident to take a riskier approach with some of your other savings

Types of risk

There are different types of risk depending on the type of asset you’re invested in. These include:

• Inflation risk – the rate of inflation might be higher than the interest rate on your savings. This effectively devalues your savings
• Currency risk – if you invest in the shares of overseas companies, changes in exchange rates can reduce the sterling value of your savings
• Investment risk – the value of investments can fluctuate significantly and you could get back less than you paid in
• Default risk – if a corporate bond issuer gets into financial trouble and can’t repay the initial investment

• More on investment assets

What level of risk are you comfortable with?

There are various level's of risk ranging from high risk to very low risk and you could have various amounts invested in each level, depending upon how much and the type of risk you are willing to take. The assets listed are examples of a range of investments with varying risks associated with them.

Overseas equities – shares in companies traded in other countries
UK equities – shares in companies traded in the main UK stock market
Property – commercial property including offices, retail outlets, factories and property company shares
Corporate bonds – issued by companies, these pay a fixed rate of interest
Cash – like bank and building society savings

Selecting the right balance

Many people saving for retirement prefer to rely on a professional fund manager to make all the investment decisions for them. This can mean saving in a fund that invests in one particular type of investment asset – such as bonds – or in a range of different asset types, known as a managed fund.

The diagrams here show the investment split of two of the managed funds available with the NatWest Personal Pension plan. This shows the current split of assets as a guide only, as these will vary over time as the different assets perform at different rates.

Cautious

Cash 9.2%
Corporate bonds 44.5%
Property 11.4%
UK equities 14.1%
Overseas Bonds 8.6%
Overseas Equities 7.4%
Managed funds 4.8%

Balanced

Cash 0.1%
Corporate bonds 16.7%
Property 3.6%
UK equities 40.3%
Overseas equities 34.2%
Managed funds 5.1%

The balanced fund has less invested in low risk investments such as cash and more in higher risk investments such as overseas equities. The balanced fund therefore carries more risk than the cautious fund.