Deciding approach to investment risk

[CuriousRunner]

I think my approach to investment risk might be similar to my politics. In some cases I'm low risk in others high risk. Politics I swing out as left on some topics and right on others 🤣. Overall, not helpful!

When it comes to my risk approach for investing, how do I decide?! Like everyone I think I want big gains but couldn't imagine it all crashing down.

I'm nearly 52. Intentionally unemployed for a short while after my December contract end. But hoping to pick up another contract with a decent daily rate in about April. How knows if that will happen or not. A decent rate would allow me to max my pension contribution in a year.

Some days I could quite quit🤣. But mostly I've got some good working years left in me. Although I'm not sure I can continue at the pace of recent years much past 60. But who knows.

Is there a scientific approach to this question?

Thanks

One approach is to hold your SIPP with an investment firm which offers portfolios of shares etc in which you can invest. If you do this, these firms have a regulatory obligation to assess your risk appetite (typically via 5 questions) known as a suitability assessment. They will then recommend a portfolio for you based on your risk appetite. There are usually 5 portfolios - high risk down to low risk. Monzo does this via Blackrock's portfolios (for example) but I don't they offer SIPP tax wrapper.

Another option is to get a financial advisor who will manage your pension choices for you and charge an ongoing fee (usually about 1% of your SIPP annually). They will also conduct a suitability assessment to understand your risk appetite which will drive the funds etc they recommend you put your pension into.

Don’t forget to factor in inflation risk and longevity risk i.e. if you’re too cautious in your approach you might outlive your savings, and inflation might eat into the value of them more than you anticipate.

I think (and I follow my elderly mother in this!) that there is a role for a two-part portfolio, if you have the resources to do so. A lower-risk part that meets your current or anticipated needs, and a higher-risk part involving money you could cope with losing much of, that hopefully might achieve bigger gains.

OP, not enough information.

How much are we talking about? How much in pension vs ISA vs trading account outside of an ISA?

Do you have some kind of emergency fund , eg a saving account with 6 months' worth of expenses?

I think the most common misconception about risk is to think of it independently of time.

Over the short term, risk mostly means the risk that the value goes up and down, and you make a loss - you invest £100 in January, in March it is worth £101 and in May £99

So in the short term it makes perfect sense to want to minimise this risk and to go for safer options, like short-dated bonds or saving accounts, that won't pay you loads but guarantee a certain, positive return.

Over longer horizons you also need to think about inflation.
If you keep money invested in safe saving accounts for 15 years, you will not make a loss in nominal terms but you will make a loss in real terms (net of inflation).
If you invest in something like a diversified global stock index, there is a very strong chance you will beat inflation. If you invest for such a long period, you don't care much about the daily ups and downs.

Note I said strong chance, not certainty. There have been few examples of the stock market languishing for many years (like the lost decade 2000 - 2010).

If you want absolute certainty, be prepared to make less than inflation.
If you want to beat inflation in the long run, you must take some calculated risks.