Investing has become more accessible than ever, and there are many different ways to get started, from opening a Stocks & Shares ISA to building a portfolio from scratch. Identifying the best investment style for your personal risk tolerance and finding a platform that aligns is key to having the best chance of success within your limits, helping you feel comfortable and confident with investing.
Understanding Different Investment Styles
There are several different ways to approach investing, and these naturally align with different levels of risk:
Growth investing – for those who can afford to experience larger short-term price swings, growth investing focuses on companies expected to grow earnings and revenue faster than the average market rate.
Value investing – where investors seek out opportunities they believe are mispriced, or in other words, look for bargains with long-term recovery potential.
Income investing – targeting assets where there’s an expectation of a steady, reliable cash flow, like government bonds or dividend-paying blue-chip stocks.
Quality investing – focusing on stability, investors look for financially sound companies with a history of reliability and competitive advantage.
If you’re new to investing and unsure where to start, passive investing could be a good option. This involves buying a ‘basket’ of assets designed to match the performance of a broad index market. As it’s designed to match rather than beat the average, it’s a slower and lower-risk way to try and grow your money.
Another option is to arrange a managed portfolio through a trusted source, such as the online Wealthify investment platform or a personal advisor. With managed portfolios, you pick a risk level, and an expert builds a portfolio that aligns and monitors its performance against the market, making adjustments as necessary. This can suit people new to investing who may lack the confidence to make judgements when browsing available assets.
Why risk tolerance matters
Risk tolerance describes how comfortable you feel when the value of your investments changes. Some people are able to accept market volatility as part of the journey, while others find negative results highly stressful. It’s not the same as risk capacity – your financial ability to absorb losses – but the two often go hand in hand.
Someone whose portfolio matches their risk tolerance often feels better equipped to stay invested. That patience can make a meaningful difference over many years. Think about how you would react if you checked your account and saw that your investments had fallen by a significant sum. Your answer can offer valuable clues about the level of risk that suits you.
Considering personal circumstances
Risk tolerance does not exist in isolation. Your income, savings, family responsibilities and financial goals all influence the investment style that makes sense for you. Those with less to invest and more demands on their money might favour low-risk investments that promise relatively stable returns. Those saving over a longer period might feel more able to risk short-term losses in the hope of beating the rate of inflation.
A practical starting point involves reviewing your goals, estimating when you will need the money and considering how much fluctuation you could realistically tolerate along the way.
Why investment always carries some risk
Every investment carries some level of risk because, unlike using savings accounts, you’re not simply storing your money in investments – it’s being put to work. Shares can fall in value, and bonds can be affected by interest rate changes. Then again, even cash savings may lose spending power if inflation rises faster than returns.
This doesn’t mean investing should be avoided necessarily. Instead, take time to understand your risk tolerance and research the different investment styles and asset options to help you make informed decisions and avoid unpleasant surprises. Diversification can help reduce the impact of any single investment performing poorly, which is why it’s one of the top tips for beginners new to investing. With direct investments, platforms often offer ‘safety nets’ to help you stay on track, such as stop-loss orders.
The goal isn’t to eliminate risk, as this isn’t possible. It’s to manage it well within your personal limits.
Reviewing Your Approach Over Time
Your risk tolerance today may not reflect your risk tolerance in five or ten years. Career changes, growing families, your stage in life or shifting financial priorities can all influence your investment decisions.
Many investors benefit from reviewing their portfolio annually and whenever a significant life event occurs. Someone who initially selected an adventurous portfolio might gradually move towards a balanced or cautious approach as they get closer to their goal, or vice versa. Regular reviews help ensure your investment style continues to support the life you want to build, rather than a life planned years ago.
