2nd Jun 2019
Evaluating your level of risk
There’s no one size fits all approach to determining your attitude to risk, but understanding how you view risk is crucial when deciding where and how you invest.
Investing always carries a certain amount of risk. There is no risk-free savings plan or vehicle. There is the risk of a bank collapse, or if you are storing cash underneath your mattress there is a risk of theft or loss. It’s therefore important to ensure a balance between your personal circumstances, your investment ambitions, and your attitude to risk; we call this your ‘risk appetite’, or ‘appetite for risk’.
So, let’s take a closer look at how you can start to assess your risk appetite?
What is essential?
• who relies on you financially?
• What are your existing commitments?
• Hypothetically, if you lost all the money you’ve invested, what would happen?
• How much money can you lose and still reach your objectives, your financial goals?
Your answers depend entirely on your personal circumstances, how much money you’re investing, and what you have determined as your financial goals and objectives.
Knowing what you feel is acceptable to lose is an imperative step in evaluating your attitude to risk. This is why when people start saving they tend to put money in the safest places; traditional banks. But, as returns are generally low, once they’ve built up wealth they will start to invest elsewhere. As wealth builds investors tend to diversify the risk in their portfolio and when they are confident to absorb the risk they often start to invest a percentage of the income in higher-risk opportunities.
What are your investment ambitions?
Often saving and investment choices depend on how long you want to invest, how much you want to invest, and what you want to achieve. The general rule of thumb being the bigger the investment, the greater the risk, and the greater potential for positive return on investment (ROI).
Investing a larger amount over a longer period may stand a better chance of producing a good ROI. It’s usual to make investments with a better chance to beat inflation on your returns. A longer period of investment might also allow you more time for recovery, should values fall.
You may prefer to pursue a short-term investment strategy, investing for, say, up to five years. Typically this lowers risk but, short-term investments may yield a lower ROI.
What is your personal attitude to risk?
How you view risk is obviously subjective, being different for everyone.
What you feel about risk might change from month to month and is based on a mélange of life experiences, current events, and future desires. For example, in a recession, many investors feel less inclined to take risk, or engage over long periods due to uncertainty. However, there is no hard and fast rule. Each person is different and your personal views can impact investment choices as much as your wealth.
Not many people are comfortable with the idea of losing money, but some are willing to accept losses in exchange for greater potential returns.
Different kinds of investments carry different risks. Shares, for example, are seen as more volatile than Bonds. Balancing your portfolio, perhaps using diverse investment assets, may well be a sensible strategy to minimise risk, while maximising returns.
Whatever your ambitions, how you feel about risk is personal to you, and only you can decide the level of risk you are comfortable with in your investment endeavours.
We assess your appetite for risk as an integral part of our service and take the time to investigate your circumstances before making recommendations. If you want to find out more about risk and investment strategies and would like to talk to someone about assessing your attitude to risk, click here to get in touch.