Risk explained

Risk is the possibility that your investments or savings won’t grow as well as you had hoped for, or needed, to make sure you have the level of income you need in retirement. If your investments perform very poorly, you could end up getting back less than you paid in.

There is no single or simple answer to this question. In an ideal world we’re all looking for the lowest possible risk with the highest possible returns, but that’s not achievable. So we all have to compromise somewhere. We all have to select the level of risk that’s right for us as individuals. It depends how we feel about the possibility that we could lose some money. But there are other key factors including:

• How long you’re investing for – generally if you’re investing for the longer term, say five years or more, the effect of short term stock market fluctuations have less impact
• How diversified your savings are – if most of your savings are in low risk savings accounts, you might be confident about putting a small amount in higher risk assets such as equities

There are different types of risk – some will only be applicable to certain types of investment asset. These include:

• Inflation risk – the interest rate on your savings might be less than inflation. This reduces the purchasing power of your savings
• Currency risk – changes in foreign exchange rates will affect the sterling value of any money invested in the shares of overseas companies. Of course, this could have a positive as well as a negative impact
• Investment risk – equity values can fluctuate considerably even in the very short term and you could get back less than you paid in
• Default risk – if the issuer of a corporate bond gets into financial trouble they may not be able to repay the initial investment

• More on investment assets

There are various level's of risk ranging from high risk to very low risk and you could have various amounts invested in each level, depending upon how much and the type of risk you are willing to take. The assets listed are examples of a range of investments with varying risks associated with them.

Overseas equities – shares in companies traded in overseas stock markets
UK equities – shares in companies traded in the main UK stock market
Property – commercial property including factories, retail outlets, offices and property company shares
Corporate bonds – issued by companies, these pay a fixed rate of interest
Cash – like bank and building society savings

Many people invest their retirement savings in funds run by professional fund managers. These funds will either invest solely in one particular type of investment asset or in a range of different asset types. Funds that invest across a broad range of asset types are known as a managed fund.

The table here shows the investment split of two of the managed funds available with the RBS Personal Pension plan.

The balanced fund has less invested in low risk investments such as corporate bonds and more in higher risk investments such as overseas equities. The balanced fund is therefore considered to be riskier than the cautious fund.

This shows the current split of assets as a guide only, as these will vary over time as the different assets perform at different rates.