If you are a saver or an investor, have you ever really considered the amount of risk you are taking with your money?
An important aspect of financial planning is to ensure that savings, investments and pension products suit your attitude to risk.
Everyone has a level of risk tolerance. I meet people who don’t want to take any risk whatsoever with their money. I also meet people who feel they have a good understating of the nature of investments and want to invest in volatile overseas markets. Perhaps unsurprisingly, most people would describe themselves as average or balanced. They will often say something like ‘I want to see my money grow, but I don’t want to gamble it away’.
It may surprise you to hear that leaving your money on deposit carries risk. If the bank fails it could be that not all of your capital is protected. If your savings return is lower than inflation, you are loosing money in real terms.
However, the issue I’d like to focus on here is investment risk, which I consider to be a very misunderstood area.
In the past, I have generally explained to my clients the types of funds available and the typical behaviour of such funds. I would often sketch the typical ups and downs of equity based investment and refer to actual fund performance statistics.
These days, I also use a more methodical approach in the form of a ‘Risk Assessment Questionnaire’. Here, I ask a series of specifically designed questions. The answers help me to establish your risk tolerance and recommend appropriate funds. I find that the nature of these questions helps to educate people about what is actually meant by investment risk and will often provoke further discussion. I’m pleased to say that this approach usually confirms the conclusion of a former discussion. However, there are some surprises and I occasionally find that people are invested in the most inappropriate funds.
To summarise, it is important that you understand how you should invest your money and the effects of the risks you are taking. This applies to savings, investments and very importantly to your pension funds.
If you would like to have your tolerance to risk assessed, or if you would like your savings, investments or pension plans to be reviewed, please contact us.
