Is risk aversion leading you to make bad investment choices?

Every investor must work out their tolerance to risk, and adjust their portfolios accordingly, as well as regularly review their stance to reflect changing life circumstances. But too much risk aversion could mean making poor investment choices. Here’s why.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
Risk aversion

When IG teamed with YouGov to survey the UK public about investing, a massive 61% said their financial risk tolerance was low risk and they would not be comfortable with making investment losses. Just 4% said they’d have a high financial risk tolerance and would be comfortable seeing large fluctuations in their wealth, while 23% described themselves as having medium risk tolerance, whereby they’d be comfortable with seeing some fluctuations in wealth.

How would you describe your financial risk tolerance?

However, when the survey asked whether short-term investment losses or not achieving longer-term financial goals would be of most concern when investing, 68% said not achieving long-term financial goals and 32% short-term investment losses.

There are many online calculators you can now use that illustrate the potential impact of different risk approaches on a long-term portfolio. Use this calculator, enter an initial deposit, a monthly contribution, a target amount, and the target time frame in years, and then use the risk appetite slider to see the potential impact of different approaches.

Every investor can, and should, manage their investment risks. There are simple rules to follow when doing this:

  • Always remember that investing is for the long-term. You are at risk of getting back less than you invest, but historically returns over the longer term have been positive.
  • Explore and fully understand your risk tolerance. As a general rule, the further away from your investment target you are, or the further away from retirement, the more risks you may be prepared to take.
  • Diversify your investment portfolio. Professional investment advisers and robo-advisers will create investment portfolios for you based on your risk tolerance and investment approach. If you take the do-it-yourself route, ensure you also diversify. Here’s more on why.
  • Do drip feed contributions into your investment pot to help smooth your returns. Regular investors can benefit from what is known as pound cost averaging, in which short-term falls in the market are actually to be welcomed, as they enable you to buy more shares at a lower cost.

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●  Discover the benefits of investing your money

●  Learn about the different investment options available and how to get started

●  Understand how to build a diversified portfolio and manage your risk

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.