In this article we'll look at what exactly risk in investing is and how to understand it.
Please note: Chip can't provide financial advice so you may want to seek guidance from a qualified professional if you are unsure or have detailed questions around investing. Your capital is at risk
What is risk?
In investing ‘risk’ simply means the chance that your investment will decrease in value and you will end up with less money in real terms than you initially invested.
Generally there is a close relationship between risk and return, with higher returns generally coming with a higher risk that the value of your investments could fall.
We have given the BlackRock funds names that give an indication of their risk/return profile, as well as a risk rating and their past performance. You should consider all this information carefully and your appetite for risk before buying into a fund.
Remember that you should never invest money you need for necessary expenses, and you should be prepared to lose the money you invest (though this is less likely with a well-diversified investment fund).
What is a risk rating? / What is “a Synthetic Risk & Reward Indicator (SRRI)”?
We use an industry standard risk rating on all funds. Known in the financial services industry as a Synthetic Risk and Reward Indicator (SRRI).
It’s a scale of 1-7 based upon how volatile a fund performance has been in the past. The higher the SRRI number is, the riskier the fund is considered to be. But remember there is typically a direct relationship between risk and reward. Generally speaking the higher the risk, the higher the reward.
How are Chip’s risk ratings calculated?
We don’t calculate the risk rating ourselves, the SRRI is provided by the Investment Manager and it is based on the ‘volatility’ of the assets in the fund (i.e. how likely they’ll increase or decrease in value).
With the BlackRock Consensus funds this is based on the split between equities and bonds. Equities (company shares) offer potentially higher-returns but are higher-risk investments. Bonds are usually less volatile and are loans to governments and large companies in return for an interest payment (known as a coupon).
We explain more about equities and bonds in our investment basics guide, but as a rule, the higher the percentage of equities vs bonds in a fund, the higher the risk rating is.
Why has my account balance dropped?
Your account balance may have dropped because the investments that make up the fund have decreased in value due to changes in the market, and so your fund units have also dropped in value.
It’s nothing to panic about and this does happen regularly with investing. It is very unlikely you will see a steady and consistent upwards growth trend, your returns will jump up and down in a bumpy line, but the overall trend should be going up when viewed over the long term.
Remember investing in a fund is not single share trading and it is not the same as playing the stock market. You must take a long-term view, zoom out and consider how things will look over a 5-10 year period.
