Possible silly questions re: Investments and risk

fimonkey

Hi All,

Sorry if this is ignorant, but I'm wondering about the 'risk' aspect of investing and have read that the younger you are the more you can afford to take a risk with your investment as long as it's for long term and that drip feeding is better than one lump sum.

I've looked at various options of spreading the investment through different sectors and what they mean for risk (i.e how much % in cash etc).

Here are my quesitons.
1. Could a person have 2 portfolios? .. A high risk one and a low risk one? or even three portfolios, low, medium and high? If yes, what are the advantages, and if no, why not?

2. I am 31, and can afford to 'loose' £100 pm (by giving up wine no-less, do my liver a world of good too). Cos I can afford to 'loose' this (and already have some savings in a fixed interest account so v.safe).. should I just go for a £100 high risk S&S ISA? If so, what kind of term would I be looking at for investing? (i.e.£100pm for how many months, and how long would the money stay there)? I'm willing to take the risk, as I see it if I lost the lot I would still be a damn site healthier through not drinking. If I gain, then winners!!

3. Would my £100 pm stayas 100pm or would I need to increase it in line with inflation?

Many thanks in advance

earlgrey_3

Drip-feeding, spreading investments around and all the other tactics most people use do reduce the risk. They also reduce the chance of getting the biggest rewards of course but that's a trade-off most of us are happy with.

Or you could take the advice of Andrew Carnegie: "The way to become rich is to place all your eggs in one basket and then watch that basket".

The older you get the fewer years you have to recover from a financial disaster. How much you invest now really depends on how well you want to live in later life and what lies down the road for you.

whu

these are not ignorant questions!
you can have 3 portfolios if you like or just spread the risk within say 1 portfolio - the advantages/disadvantages are all about how risk adverse you are
you are allowed a maximum of £7200 in ISA 's in any tax year - either all in S&S ISA's or a max of £3600 in a cash ISA and a max of £3600 in S&S ISA - generally you should look to leave money in a S&S ISA for as long as possible so it builds up over time and rides out drops in the market but remember if you close an ISA you lose the tax benefits so it really is a long term investment - you can increase contributions as long as you do not go over the max allowance
if you decide to play a bit safer you could just invest the money in a cash ISA at a fixed rate so you know what you will get at the end of the year and keep adding to it each year as you get more disposable income

fimonkey

Thanks earlgrey,

I will be Ok in later life (not fabulously rich, not poor either). I'm kinda willing to take a punt with this £100 pm but only for about 2 years and then review (if doing appalingly badly stop throwing money after bad). Just want to give this a try to see how it fares really, willing to leave the investment well alone and jsut stop investing money if it gets that bad?

Can anyone answer my questions specifically please?

fimonkey

Thanks whu, I already have cash ISA's, and I would hold this £100pm investment in an S&S ISA too for long term,... jsut wonderingwhether I should have 2 portfolios (med and high risk - already have low risk fixed interest cash savings) and pay in £50pm to each, = would then this make my risk 'medium-high'?

Lokolo

fimonkey wrote: »

Thanks earlgrey,

I will be Ok in later life (not fabulously rich, not poor either). I'm kinda willing to take a punt with this £100 pm but only for about 2 years and then review (if doing appalingly badly stop throwing money after bad). Just want to give this a try to see how it fares really, willing to leave the investment well alone and jsut stop investing money if it gets that bad?

Can anyone answer my questions specifically please?

Ok well if you can't really afford to lose £100 a month, then go for a little less, say £50. Hargreaves and Lansdown allow minimum of £50 a month into funds and things, so go about this. Then if you can afford to put £50 in a Cash ISA for instance do this, and keep this for backup, for instance, if theres problems with car etc.

Technically you should pay £100 this year, £102.50 next year because of inflation but it doesn't matter. Basically your salary technically should raise every year because of inflation and jobs generally getting more money, so yes, you should. But in reality it doesn't happen like that. After 3 years it would only be about £10 raise!

Anything else?

p.s. I am not an expert or anything, jus tthings I have learnt from here! One of the IFA's wil come along and tell me I'm wrong sooner or later :rotfl:

Also you should be looking to invest for around 5 years +, not 2.

purch

Risk really has little to do with age, it has more to do with attitude.

In fact as a person get's older they may be able have a greater understanding of 'risk' , and therefore be able to take better and more informed risks.

Could a person have 2 portfolios? .. A high risk one and a low risk one? or even three portfolios, low, medium and high?

In reality, you will only ever have one portfolio of investments, and it is within that portfolio than you need to learn to manage risk in order to be successful over the longer term. Anyone can strike it lucky and any stage, and be 100% invested in one asset class or region ie. China and make a good profit. But unless you understand that a strategy like that is hugely high risk, and that the returns were probably more by luck than real judgement, then in the longer term you will be doomed to taking high risk 'punts' and losing more often than winning.

Managing and understanding risk are lessons often learnt the hard way, unfortunately.

Managing risk poorly, and to be over cautious when you could have been bolder will cause a loss of potential gains, which the investor may never know they could have made.

So not understanding and managing your Risk properly can hurt you in both directions.

whu

I am sure there are more qualified people than me who can advise but it seems to me that if you put in £100pm for 24 months that will be £2400 - if that was put in a high risk S%S ISA for only 2 years i think it unlikely to yield a great benefit and even less if you put it into medium risk - so i would think that if you are going to go this route you should look at at least 5 years with the monthly contributions being £100 or more each month so after 5 years you would have £6000 and if you got a good return on that it could be quite juicy

earlgrey_3

purch wrote: »

Risk really has little to do with age, it has more to do with attitude.

I'd suggest that assessing risk is nothing more than measuring the downside against the upside.

If you're retired and need your investments to live on then taking risks that could lead to hardship doesn't make much sense and 'jam tomorrow' becomes less enticing at 92 than at 29. Can be commitments you have to take into account when you're younger too, such as if you need your nest-egg to put kids through uni.

If the impact of the downside is greater than that of the upside then it's wrong for you. For fimonkey at 31 it sounds as if there's not much downside so it's all down to how he feels and what he's going to need.

tradetime

But unless you understand that a strategy like that is hugely high risk, and that the returns were probably more by luck than real judgement, then in the longer term you will be doomed to taking high risk 'punts' and losing more often than winning.

Possibly even if you appear to understand the risks the end result can be the same.

http://www.bloomberg.com/apps/news?pid=20601109&sid=azobDABpF9ZU&refer=exclusive

purch

I'd suggest that assessing risk is nothing more than measuring the downside against the upside

In it's very basic terms yes that is right.

But to me understanding Risk is far more complex

To understand risk you need to realise that;

It's often far more Risky to 'sit on your hands' and do nothing than it is to have a position

These 'Absolute Return' Funds like the Blackrock Absolute Alpha could easily be a higher risk investment in the long term than a long only equity fund.

That trading in a highly volatile assets can be low risk if you understand how to hedge yourself effectively

I could go on and on.

Risk can't just be measured by how much you can or can't afford to lose, especially as in most cases investors either don't really know the answer to that question until the worst happens.