Your guide to Risk & Return

Transcription

1 Your guide to Risk & Return Your money. Our expertise. This guide is for information purposes only. It should not be seen as advice. Investments in the stock market may fall as well as rise, and it is not an appropriate place for short term investments. You may get back less than you paid in. All investment carries risk and it is important you fully understand these risks and are willing to accept them.

2 Understanding risk We make decisions about how much risk we are comfortable taking every day. Like crossing a road, for example. Some of us will choose the safest route and only cross when on pedestrian crossings or given a green light to do so. Others will take a chance and cross when they see the road is clear. Investing involves making similar decisions about how much risk you feel comfortable taking with your money. That s why we ve created this guide to help you understand what risk actually means in investment terms, and how it might impact the type of investment you choose. Contents What is the risk in investment? 2 Your risk profile 3 Risk & Return: The trade off 4 Working out if investing s right for you 5 Why invest with? 7 How to contact 8 Glossary 9 1

3 What is the risk in investment? When we think of the word risk, it s generally associated with hazards or danger. However, in investment terms, it primarily refers to the level of uncertainty of your investment outcome. All investments carry a level of risk because your money can go down in value as well as up, so you may not get back as much as you originally invested. So if you are considering investing your money, you need to decide how much risk you are prepared to take. You should consider your financial position, and the plans and goals you have for the future. At, we understand that your circumstances and plans can change, and that your attitude to risk and investing may change too. That is why when you invest with Click & Invest, our specialist Investment Team will continuously manage your portfolio, to ensure your investments always reflect the level of risk you are comfortable taking. You can update us at any time if your circumstances change. 2

4 Your risk profile Understanding your own attitude to risk is very important when it comes to investing especially if there s a chance of losing money in the pursuit of higher returns. At, in order to determine your risk profile, and therefore which investment strategy is right for you, we ask you about two different elements of risk. 1) Your Attitude to Risk This can be viewed as your willingness to take risks when you make investments. High risk investors don t mind seeing large negative swings in their portfolio value if they are confident that in the future it may grow higher. Low risk investors may experience less volatility in their portfolio but understand they may receive lower potential returns than a higher risk portfolio. At we will take you through our Attitude to Investing questionnaire, which allows us to measure your individual risk appetite. 2) Your Capacity for Loss Equally important is your Capacity for Loss. This can be seen as how much risk you can afford to take, or the degree to which your personal circumstances limit your investment options. Investors with a high capacity for loss could hypothetically lose most or all of their investment without impacting their livelihood. To summarise, we need to determine how much risk you are willing to take and how much risk you can afford to take. If you have a lower tolerance to risk, and would prefer to keep the risk of losses to your investments as low as possible, then you would be better off accepting the likelihood of lower returns and choosing stable investments such as bonds issued by governments and corporates, which are likely to gradually grow in value and are less prone to high volatility. At, we will ask you a number of questions to assess both your attitude to risk and your capacity for loss. Based on your answers we will determine a risk level for you, which we will then use to create your portfolio. If you have a higher tolerance for risk, then you may be willing or in a position to take a higher level of risk with your investments, in return for the chance (but not the certainty) of achieving higher returns in the long run. If this is the case, then higher risk investments such as emerging market equities or smaller company equity funds might be suitable for you. 3

5 Risk & Return: the trade off Taking a risk is often considered worthwhile if it offers an opportunity of greater reward. Investing is no different. The graph below provides an idea of the typical relationship between Risk and Return on an investment over several years. It will help you understand how the level of risk you take with your money may affect the amount you receive in return. VALUE TIME Low risk portfolio High risk portfolio For illustrative purposes only It is important to understand that higher risk portfolios don t always produce the highest returns. In the graph above, there is a period of time when the lower risk portfolio outperforms the higher risk portfolio. Investors in the higher risk portfolio should be willing to accept the larger short-term losses in exchange for potential greater long-term growth. At, our Attitude to Investing questionnaire will help us to understand how much risk you are willing to take with your investment, and also how much you can afford to take without it materially affecting your lifestyle. Based on this information, we will be able to create a suitable investment portfolio for you that may help you to reach your investment goals at a risk level you are comfortable with. 4

6 Working out if investing is right for you Before you make any decisions, it s important to understand if investing is the right thing for you and your money. To help you decide, we recommend writing down what you would like to achieve by investing (to save for a deposit on a house, for example) and also how much risk you are prepared to take. Here we have listed a number of questions to ask yourself, which may help you make the right investment decision. 1) What are your goals? What do you want to achieve with your money/what are your investment goals (e.g house deposit, children s education)? Are you looking to simply grow the value of your money over time? [ ] Yes [ ] No Or is there a set amount that you want your money to grow by, and if so how much? 2) Over what timeframe do you want to invest? Once you ve worked out your goals, you need to decide for how long you can invest your money. Do you need quick and easy access to your money or have a goal that you want to reach in under three years? If the answer is yes, you might be better keeping your money as cash in a bank or building society account. That way you will not risk any capital losses that could affect your short-term goals. If the answer is no, and your investment goal allows you to leave your money for three years or longer without touching it, then investing may be suitable for you. Having a long-term timeframe in mind is important when investing, as it gives your investment time to grow, and recover from any short-term losses. Typically, the longer your time horizon, the more risk you can afford to take. For the highest risk portfolio we offer at, we recommend a minimum time horizon of seven years. 5

7 3) How much risk are you willing to take? Investing carries a certain amount of risk. As investments typically fluctuate in value over time, it is important to understand that the value of your investments can go down as well as up, and that you may not get back as much as you originally invested. That s why it s really important to understand your own attitude to risk, what level of risk you are comfortable taking, and how much money you could afford to lose without it having a financial impact on your lifestyle. How do you feel about putting your money at risk? How would you feel if some or all of it was lost, even over a short period of time? I m happy to take (tick your preferred option): Low risk This is considered a safer investment option, as the chances of losing the money you have invested will reduce. However, less risk could mean your return is lower than that of a medium or higher risk investment. Examples of low risk investments: Cash, Bond or Fixed Interest Medium risk There is a greater chance that you could lose some of the money you have invested, but also an improved chance that you may increase the value of your investment over time. Examples of medium risk investments: Blue-chip equities, Property High risk 4) How much do you want to invest? How much can you realistically afford to invest? It is important not to overstretch yourself, and you should always have at least three months worth of outgoings kept separately. As investing is a medium to long-term strategy, it is best if you can avoid making cash withdrawals, to ensure that your investments perform as well as they can over time. If you did lose money, how easy would it be for you to accommodate those losses? For example, would it affect your family or lifestyle? There is a greater chance that you could lose a significant amount of money, or even all of the money you ve invested. However, there is also the potential to increase the value of your investment further over time. Examples of high risk investments: Emerging markets, Smaller company equity funds 6

8 Why invest with? is an online investment service for individuals with 10,000 or more to invest. Your investment portfolio is created and actively managed for you based on your attitude to risk and your investment goals. Our experienced Investment Managers will take care of the hard work and make investment decisions on your behalf. Your investments actively managed by experts Our specialist Investment Team will continuously manage your investment portfolio for you. They take responsibility for making changes to your investments, to help you achieve your investment goals. Their decisions are based on their experienced assessment of market conditions, and supported by the analysis of our in-house Research Team. 180 years of investment experience is part of Investec Wealth & Investment, who have over 180 years of experience managing clients investments. We re also part of the Investec Group, who currently look after over 161 billion* for clients worldwide. So you can feel confident knowing your money is in expert hands. *Funds under management as at 31 March 2018 Intelligent advice that s specific to you The advice we offer is always specific to you, your attitude to risk and your investment goals. We understand that your situation could change, so you can update your investment goals at any time. This allows our Investment Managers to continuously assess which investments are right for you. We don t just track the market At, we won t only buy investments that simply track the market. Instead, our experienced Investment Managers, along with the support of our in-house Research Team, will actively aim to beat it. We will select investments that we believe are right for you and your investment goals. Transparent fees At, we believe in being totally transparent with our clients, and our fees are no exception. Fees are an important consideration in determining the long-term performance of your investment portfolio. That is why we keep our management fee as simple and low as possible. 24/7 Access You can stay up to date with the performance of your investments whenever and wherever you like. Simply log in to your account online or via the Investec App 365 days a year. Or if you prefer you can call our dedicated support team with any account questions you may have. 7

9 How to contact If you are interested in, visit clickandinvest.com/riskandreturn. Alternatively, give our dedicated support team a call who will be happy to answer any questions you have about setting up your account. Our team are available 24 hours a day, 365 days a year. Or, if you d prefer, you can speak to us on Facebook or Twitter. Call us or us Follow us Investec Investec Investec Investec Limited is an Appointed Representative of Investec Wealth & Investment Limited which is authorised and regulated by the Financial Conduct Authority. Investec Wealth & Investment Limited is entered on the FCA register under reference Investec Limited is registered in England, Company Number Registered address 30 Gresham Street, London, EC2V 7QN. CLI011_V3.05/18 8

10 Glossary Alternative Investments An investment in any asset class other than stocks, bonds, cash or property. Typical alternative assets include hedge funds, commodities such as precious metals or oil and gas, and collectables such as art, wine, antiques or stamps. Blue-chip Equities A blue-chip equity is the stock of a large, well-established and financially stable company that has operated for many years. Bond or Fixed Interest Investments A bond is when an investor lends money to a government or company in exchange for regular interest payments, as well as future repayment of the original amount lent. Emerging Markets An emerging market is a country whose economy is progressing towards becoming more advanced, usually by means of rapid growth and industrialisation. Fixed Interest Fixed interest is an interest rate such as on a loan that remains fixed either for the entire or for part of the term. Fund A fund is a pooled investment vehicle which brings together money from multiple investors. A fund manager will then invest in various asset types, such as equities, bonds and a variety of other securities, depending on the objective of the fund. Interest The charge you pay to borrow money, typically expressed as a percentage of the amount borrowed. A saver or lender receives interest from the person or institution they have lent their money to. Investment portfolio An investment portfolio is a combination of different investments mixed and matched for the purpose of achieving your financial goals. Individual Savings Accounts (ISAs) These are tax-efficient savings or investments that allow you to save and invest a limited amount each year. There are two kinds of ISA: stocks and shares ISAs and cash ISAs. All income you earn and capital gains you make on funds and cash held within an ISA are tax-free. The tax advantages of ISAs may change in the future and also depend on your individual circumstances. Property An investment in Real Estate, i.e. land and buildings. A typical property investment will be via a fund, investing in commercial real estate such as office and retail space. Stocks When you own more than one share in a company or several companies, these are called stocks, because stock generally refers to a portfolio of shares. Shares Shares represent a share of ownership in a company and these shares are listed on the stock exchange. If you buy a share in a company, the company can use your money for its own purposes (for example, to expand its business) and in return you own a proportion of that company. The aim is for the company you invest in to grow in value, making your shares increase in value too, or to receive a share of the company s profits in the form of dividends. Volatility The extent to which asset prices or interest rates fluctuate over time. Volatility is often used to assess the potential risk associated with an investment. 9