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Manage risk

Investing is about taking risks that you're comfortable with.

Important information - please keep in mind that the value of investments can go down as well as up so you may get back less than you invest. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

Understanding risk

It's important you understand and manage risk. This will help you steer clear of the more common investing mistakes. The first thing to learn is that risk isn't the same as volatility.

Volatility describes the natural rise and fall of markets - which isn't within your control. What you can control is the level of risk you're prepared to take when choosing your investments. This will depend on what your financial goals are, how long you want to save for and your personal circumstances.

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Take the right risks

The theory

Ultimately you need to choose a level of risk that you feel comfortable with. The higher risk, the higher the potential returns. The lower the risk, the lower the potential returns. You need to think about how long you want to invest for and your personal circumstances - before deciding which level of risk might help you achieve your financial goals.

How it works in practice

This example is for illustrative purposes only. In reality investments go up and down and charges apply. Past performance is not a reliable indicator of future returns.

Shares are at the higher end of the risk spectrum. But greater risk can lead to potentially greater returns. A balanced portfolio should include a mix of all these assets, rewarding investors for staying invested and riding out market ups and downs. 

Learn more about the main asset classes. 

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Watch out for inflation

The theory

Inflation is a term that’s used to describe rising prices. It can erode the buying power of your money over time and is a risk to the value of your assets over extended periods. It’s particularly important to factor in inflation when thinking about your pension pot. Your investments need to rise by at least the rate of inflation in order to maintain their value in real terms over time – otherwise it’s unlikely that you’ll be able to maintain the lifestyle you want for yourself.

How it works in practice

According to the ONS, the average UK household spends £62.20 per week on food and non-alcoholic drinks. As you can see below, an ‘average weekly shop’ will cost you a lot more down the line once you take inflation into consideration. If you want your pension to have the same purchasing power in the future as it does now, you'll need to take steps to mitigate the effect of inflation in the years to come.  

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Source: Fidelity International

Mix it up - diversification matters

The theory

No one can predict the future and that's particularly true of investing. It's impossible to know which asset class, country, continent or industry sector will perform best or worst in any given year. You can get lucky and pick the top performer one year. But the chance of you doing this consistently is pretty slim. It's much better to hold a mix of investments (the technical term for this is a diversified portfolio). Some will perform well at a time when others don't do as well, so they help to balance each other out to potentially give you a smoother ride over time. 

How it works in practice

If you take a look at the animated chart you'll see that the top performer is different most years. If you only held government bonds, you'd have done very well in 2008 and reasonably well in 2018, but not so well for all the other years. Don't put all your eggs in one basket. 

Don't be forced to sell

The theory

Over the year, markets rise and fall. This is only a problem if you need access to your investments at short notice and you're forced to sell after a fall in the market - as you'll be locking in your losses. 

Having some cash set aside, ideally somewhere between 6-12 months of normal expenses, will allow you to wait out a market downturn and hopefully sell at a better time. 

How it works in practice

This example is based on a balanced portfolio, but other variations would perform differently.

In the chart below, the blue lines show the returns each year from a balanced portfolio of shares and bonds. 

The red dots show the biggest top-to-bottom fall for the portfolio in each year.

As you can see, even when there were substantial top-to-bottom falls within a year, this example of a balanced portfolio often managed to recover enough to post a positive overall return by the end of the year.

It's a good idea to keep some cash in reserve to cover any unexpected expenses so that you're not forced to sell any of your investments at short notice. This will help you avoid the worst falls.

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What are the main asset classes?

Equities
Bonds
Commodities
Property
Cash

What next?

Find a diversified fund with Navigator

If you're not sure what to invest in, Navigator helps you find a multi-asset fund.

The Fidelity Select 50 Balanced Fund

This fund has a medium-risk profile and a diversified spread of funds that invest in different asset classes, including bonds and gold.

Managing investments in uncertain times

What is volatility? And how can you deal with it?

Important information - please note that Navigator is not a personal recommendation in respect of a particular investment. If you need additional help, please speak to an authorised financial adviser. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals.

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More principles

Make it last

Build a flexible income plan - so that your investments last as long as you need them to.

Start investing

Time in the market may increase your chances of investing success.

Be tax-efficient

Don't pay more tax than you need to.

Invest regularly

Reduce the risk of trying to time the markets by investing regularly.