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Investment Risk - Saving For Retirement


What does a QROPS cost?

Investing involves risk. There are many different types of risk when investing; inflation risk, shortfall risk, manager risk, liquidity risk, market risk, currency risk, inflation risk, etc. But it is volatility that a vast majority of private investors associate with the most when thinking about risk.

Volatility can be simply defined as dispersion of returns for a given security or market index around an average (or mean return). If a particular security’s returns fluctuate wildly around its average return then it is said to be highly volatile. Bank deposits, for example, have a great deal of certainty associated with their projected returns and therefore have a low volatility.

Generally speaking, the daily or monthly returns of listed shares can fluctuate quite a lot and they will therefore exhibit significant volatility. High volatility leads to uncertainty in expected returns, and it’s this uncertainty factor that worries most investors.

Generally, investments that are expected to pay higher returns involve more volatility risk. While these investments are likely to produce higher returns over the long term than more conservative investments, over short and medium term periods they can fall in value.

The selection of the appropriate asset allocation and underlying funds must take account of the level of risk you are willing to tolerate.

Your financial advisor will usually complete a risk-profiling assessment with you. The outcome of this assessment will tell you, if your risk profile category is;

  • Cautious
  • Conservative
  • Balanced
  • Growth
  • Aggressive
  • Speculative

These terms may vary somewhat from firm to firm and sometimes this result is provided on a scale of 1 to 5, or 1 to 10, with 1 being risk averse and 10 being speculative for example. Whatever the case, your financial advisor or discretionary manager will use this information in conjunction with your preference, circumstances and objectives to tailor a portfolio to your unique situation.

The most common measure of Volatility is a statistical calculation known as Standard Deviation. Standard Deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance.

The table shows risk relationship between risk and return.

Investment Risk

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