Four ways to manage risk in your ISA

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.

There tend to be a few common (and very reasonable) niggles for cash savers exploring stocks and shares ISAs for the first time. One is the idea of risk and the thought of losing money. Another is not knowing what to invest in. So far, so normal. The good thing is that getting to grips with the former helps you solve the latter for yourself. Here’s how to think about managing risk in your stocks and shares ISA.

Setting off for work with 5% battery? Risky. Grabbing a late-night petrol garage tuna mayo wrap? Yep, risky too. This ‘will disaster strike?’ version of risk isn’t the same as the investing kind though.

When it comes to your stocks and shares ISA, risk is all about the likelihood of those stocks not working out and how probable it is that you’ll hit the goals you set for yourself, and the chance you’ll fall short. Two things here: first, notice we haven’t talked about how bumpy the ride is throughout the journey. That’s risk’s cousin, volatility, and it’s connected but is more about the in-between part, not the beginning and end. Second, while you can’t control the markets, you do get the ultimate say in what you invest in - that means picking investments with different risk levels which, together, match your risk personality.

So, investment risk isn’t about hopping onto a bucking bronco and seeing how long you can hold on before being chucked. It’s more like weighing up the strengths and weaknesses of a bunch of horses and assembling a stable that can tackle the Grand National or a spot of dressage if the need arises.

The best investors are never reckless but nor are they anxiety-ridden. If the fear of loss is running your portfolio, it might end up with your money sitting on the sidelines for too long or with you sniping at gains as soon as you see positive returns crop up. While loss aversion is natural (we tend to feel the pain of a loss more than the joy of a gain) we have to remember that volatility is the price we pay for the long-term outperformance of shares over cash. It’s why we need to take a step back and make sure the overall asset mix suits us - whatever moves markets make every day shouldn’t shake the much longer case for the set of investments you hold.

What’s more, if you are constantly selling and keeping your money in cash, another risk pops up - inflation. It all points to two things - being comfortable with the actual investments rather than the day-to-day lines on screens, and position sizing. As George Soros said, “It's not how often you're right or wrong, but how much you gain when right and how much you lose when wrong.” We’re investors, not gamblers, so make sure you aren’t putting all your expectations on one stock.

Raise the Jolly Roger - for this point we’re setting sail.

Investment risk is a personal thing. After all, we have individual goals and a full spectrum of readiness for the ups and downs the market naturally gives us. That’s why getting that initial asset mix is important - it sets the course for your journey and gives your ISA ship a name i.e. HMS Slow and Steady, The Balanced Barge or The Growth Galley. That takes into account how much you can stomach short-term waves, how much you are able to invest, how big those financial goals are and how far off land is.

Once you get the trade-off between these points, you can raise the anchor. Just make sure you don’t start adding in wacky crew members along the way that could alter your course or steer you into choppier waters. It can be tempting to keep adding new assets over time but good risk and volatility management starts with your central goal, not with the latest hot stock.

So far, it’s mainly been about the theory of getting the assets to suit your goals and concentrating on the horizon, not the pavement in front of your feet. What about the non-textbook side of it all, namely our nerves and emotions? This is our hard-earned money after all - the feeling that we might be making a mistake unknowingly can be a lot to bear. That’s the part that a lot of the guidance misses - there’s a real person with real money goals behind it all, not just an academic exercise. And when there’s something precious on the line, we really aren’t a composed lot. We overtrade, we sell through fear, we get greedy, we forget why we bought something - we can really hurt ourselves if we aren’t careful.

So, take human nature out of it as much as possible. Plan for the pressurised times when we might be tempted to act rashly long before it all happens. One way might be to invest in the same assets at the same time every month. That gets rid of the urge to try and time the market (notoriously difficult). Writing down the reasons for buying a stock, as well as what would make you sell also give you a reference point to stick to. Giving your stocks and shares ISA a health check every six months to make sure the risk balance still works for you can be helpful too.

The whole point here is to let the cool-headed version of yourself take charge, and limit the overly jumpy part’s access to your money as much as possible.

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.

Robinhood doesn’t provide tax advice. You should seek advice if you have any questions regarding the impact your investments will have on your income tax and tax filing requirements.