Investment risk and diversification - by independent financial adviser John Bramwell

Risk and Diversification

Investment risk

All forms of investment carry some degree of risk. Even coins kept in a bank vault, though they may well be safe, are still at risk that their value will not keep pace with inflation. In general, the greater the anticipated reward through investment growth, the greater the risk that the investment does not perform adequately and that the capital is eroded.

Good investment strategy involves the balance of risk and reward. Historically, long term investment growth for the shares of companies (equities) has been greater than the return from cash deposits. Hence equities are one of the main elements of an investment portfolio, but they do suffer from greater price fluctuation (volatility).

Attitude to risk

It is essential that any investment you make is consistent with your attitude to risk. Like all financial advisers, BV Services is required to assess your attitude to risk before recommending an investment. This is to ensure you understand and are comfortable with the range of possible returns on the investment.

There are several methods for assessing attitude to risk. Typically you make a selection from a list of descriptions, ranging from:

No risk (you are prepared to accept potentially lower returns from investments where your capital is not at risk), to
Speculative (you are happy to invest in individual items, such as shares, with the aim of potentially higher returns, and to accept the increased risk of a loss on your capital).

Quite often your attitude to risk will vary according to the type of investment, and will change with age and circumstances. BV Services offers an annual review to ensure that your investments continue to match your attitude to risk.

Why is diversification important?

Diversification is important for reducing the risk in holding investments; it is essential that you do not ‘keep all your eggs in one basket’.

Diversification can be achieved, for example, by holding shares from different companies, geographical areas and market sectors, and by investing in other assets, such as commercial property. The most effective diversification is achieved by holding assets that are unrelated to each other.

Using appropriate collective funds is a cost-effective method of building a diversified portfolio of investments, and preferable to holding individual shares, particularly if a share portfolio is less than £100,000.