Risk and reward

Can I reduce risk to my investment?

You can't get rid of risk completely but it's possible to manage it successfully.

Spreading your investment risk: you can reduce risk by putting your money in different types of investment with varying levels of risk, for example, company shares, fixed interest securities, property and cash.

Pooling your investments: this is where you buy into funds, and your money's invested with thousands of other people's money into a wide range of company shares. Although less risky than individual company investments, if the stock market as a whole is falling in value, your pooled investment will probably also reduce.

As well as investing in shares, pooled investment funds can also be:

• fixed interest securities (such as corporate bonds, government bonds or both)
• property
• a mixture of company shares, fixed interest securities, properties and cash

However you choose to invest, saving your money in a range of assets means that, if something happens to one of your investments, your overall loss is reduced as it's balanced out by your other investments.

What are the different types of risk?

There are many different types of risk, for example, your investment may not grow to be as big as you want or need it to be.

It's important to make sure you know about what could happen to your money when you invest it, so here's some information about the different risks.

The amount you invest

• The risk that you may not get back as much as you put in.
• Investments generally go up and down in value, some types more than others.
  • For example, share prices generally change daily.
• If you take any money out it increases this risk.
  • The more money you take out, the less is left to grow. So it's harder to get back what you put in.

Your investment goal(s)

• Your investment may not give you the amount you'd like or need in the future.
• You need to make sure you keep an eye on how your investment's doing.
• If it's off target you may need to invest more.

Income

• Your investment may not give you the amount of income you'd like or need.
• This may be now or in the future.
  • For example, this is important if you need a particular amount of income from your savings.

Inflation

• Your investment may not keep up with inflation.
• This may reduce what you can buy.

Lost opportunity

• Your investment may not do as well as where you had it before.

Accessibility

• You may not be able to get your money as quickly as you need it.
• It isn't always possible to cash in investments instantly.
  • For example, if you were invested in property it may take a long time to sell.

Timing when you buy and sell your investment

• The value of individual investments can go up and down every day.
• Also, investment types may generally rise or fall over longer periods due to economic conditions.
  • For example, rising inflation or interest rates.
• This means that you might buy or sell investments at what may turn out to be the wrong time.
• It's not possible to know the future so you need to make sure you're happy with when you buy and sell.

Fund specific

• When you buy a product from Legal & General, you may have a choice of funds you can put your money in.
• The funds you choose have risks linked to what they invest in.
  • For example, if a fund invests in US equities, it takes investors' pounds to America and changes them to US dollars to buy and sell shares in US companies. It then changes the US dollars back into pounds when investors get out of the fund. There's a Currency risk depending on how many dollars you get to the pound.
• You'll be given details of these risks before you invest.
• You should make sure you understand the fund specific risks, and are willing to take them, before choosing a fund.

Your attitude to risk

Identifying your attitude to investment risk is very important. We’ve created four attitude to risk categories to help you with the way you look at risk and investing your money – minimal, low, medium and high. We’ve also put all the funds we offer into one of these four categories to make it easier for you to choose where to invest.

How Legal & General decide on the risk rating of the funds

Legal & General have organised the funds into four risk categories based on the risks they think they present to your money, assuming you’ll keep your investment for at least five years. To help make it clearer, they show their view of the risk rated funds on ‘risk meters’. These are basically a scale running through the four risk categories, from minimal up to high. Each fund is given a place within the scale so you can compare it easily to other funds.

The ratings have to be calculated without knowing your personal attitude to the different risks that exist. When you’re looking at where to invest it’s therefore important that you don’t just rely on the rating. You need to look at and think carefully about all the different risks that have been outlined. Then decide how your view on them, combined with the risk rating, affects where you might want to invest. Your circumstances and outlook are unique, and so it’s this that should be influencing your investment decisions. If you’ve got any doubts or questions, you should talk to your Senior Financial Consultant.

Risk ratings

The risk meters show a 'spectrum of risk', so while two funds could be in the same risk category, they don't necessarily have the same level of risk. A fund near the top of one risk category might have a more similar risk profile to a fund near the bottom of the category above it than to funds lower down in its own category. You can look at risk categories both in terms of the type of investor for that category and the sorts of funds that are available.

Minimal Risk

If you're only prepared to take minimal risk it's likely that your main concern is the security of your money.

Other people with this attitude to risk often share a number of common traits.

• You prefer investing in banks and building society deposits
• You tend to limit where you invest to these
• You look for stability in the value of your investment
• You view the security of your money as more important than the possibility of the buying power of your money reducing as a result of inflation
• You're unlikely to invest in shares or property and would prefer funds that didn't do this

Minimal risk funds tend to be cash or cash-like investments. Minimal risk doesn't mean there's no risk.

Low Risk

If you are a low risk investor, it's likely that, when investing your money, you look for the security that your investment's value won't go up and down a lot.

Other people with this attitude to risk often share a number of common traits.

• You're happy to invest in non-cash assets, such as fixed interest securities
• You accept that the value of your investment isn't guaranteed and might go down as well as up
• You're comfortable with some of your money being invested in shares, but not all of it, and some of it may be outside the UK
• You accept that it's possible you may lose some of what you invested for the prospect of better growth
• You'll probably want to spread your money across different types of investments, which should help to reduce the risk by balancing out one type of risk against another

Low risk funds tend to have a mix of investment types, or just fixed interest securities.

Medium Risk

If you've got a medium attitude to risk, it's likely that you already have an interest in investing and are comfortable with the ups and downs of the stock market.

Other people with this attitude to risk often share a number of common traits.

• You're happy to put a significant proportion of your money in shares or other unpredictable investment types
• You accept that there's a real risk of losing your money, but this is balanced with the prospect of greater growth
• You're likely not to mind investing outside the UK
• You might have an interest in and knowledge of the stock market
• You understand the general risks involved with investing

Medium risk funds take risks to provide greater returns. They tend to contain higher risk fixed interest investments, shares and commercial property. These may be outside the UK.

High Risk

If you're prepared to take high risk, it's likely that you're an experienced and knowledgeable investor, whose primary aim is to achieve the highest possible returns on your money, while accepting that this means taking substantial risks.

Other people with this attitude to risk often share a number of common traits.

• You're happy to invest in funds in specialist areas or new markets, or both
• You're looking for high returns on your money, and you're willing to take substantial levels of risk to achieve it
• You accept that there's a real risk of losing your money, but this is balanced with the prospect of greater growth.
• You're attracted to new markets with substantial risk, or enjoy trying new types of investment
• You accept that the value of your investment can change rapidly and by a large amount, possibly resulting in total loss of your money
• You're experienced in investing in the stock market, and probably already manage a range of your own investments
• You understand the risks posed to your money when investing, particularly that your investment is very likely to regularly go up and down in value

High risk funds tend to be in specialised areas or in one or more countries outside the UK.

We can't tell you where you should put your money. For some people, a mix of funds is the most appropriate option. Others prefer to invest only in one fund. There's no one 'best' place to invest. Wherever you decide to put your money, you'll need to make sure it's in a fund or funds that you feel comfortable with.

An important thing for you to remember

Based on their experience, Legal & General have come up with a set of risk ratings. These show how they feel the risks of some funds compare against the risks of others. This is their view now, but they might change their mind in the future, so this could affect the risk categories of the funds you’ve chosen. It’s up to you to review your situation regularly with your Senior Financial Consultant to make sure that your funds remain the right choice for you.

Risk meter

Spectrum of risk

Legal & General have designed this meter to give you a clearer picture of the level of risk to capital associated with a particular Unit Trust/Open Ended Investment Company (OEIC). You can use the meter to see how different products compare and where within a risk category they are placed. Legal & General classify the Trusts/OEICs in terms of the risk they believe they present to your capital assuming that you hold your investment for at least five years. Please note that the risk could be increased if you do not remain fully invested for at least five years. Please refer to the specific product documentation for full details.

These ratings are based on Legal & General's current view of the relative risks of such products based on their experience. They may change their view of the amount of risk presented by certain types of investment over time. You should make sure that you review your situation regularly to make sure that the products you have chosen are still suitable for you.