Generally, higher-risk investments tend to have the opportunity for higher returns over the long term, but may experience more ups and downs along the way (volatility). Whereas lower-risk investments tend to have less opportunity for higher returns over the long term, but may experience less volatility along the way.
The risk indicator has seven risk ratings, from 1 (being the lowest risk, potentially lowest returns) through to 7 (highest risk, potentially highest returns).
To calculate the risk indicator score, we use an industry-standard formula known as portfolio variance to calculate the historical volatility of your investment plan, weighted to accommodate the % you’ve allocated to each investment.
This can be a helpful tool to assess how the investments you’ve chosen affect the overall diversification, volatility, and risk of your investment plan.
Risk rating | Volatility |
1 — Very low volatility | 0% - 0.5% |
2 — Low volatility | 0.5% - 2% |
3 — Low - medium volatility | 2% - 5% |
4 — Medium - high volatility | 5% - 10% |
5 — High volatility | 10% - 15% |
6 — Very high volatility | 15% - 25% |
7— Extremely high volatility | 25% |
For example, if the risk rating is a 5, your investment plan could experience high volatility.
Everyone has different tolerance levels for risk and volatility. Being able to see the risk rating gives you the chance to work out if you’re comfortable with the volatility based on your risk tolerance and your current situation.