With saving and investing comes inevitable risk; changing economies, shares going up and down in value, and the push and pull of organisational success and prevailing politics.
It’s 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?
Know what you can lose
• 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.
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 very 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. However, recovery periods are rarely accurately predicted.
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.
Human nature dictates that, when markets rise, we inevitably feel more comfortable with risk; when they fall we feel understandably less comfortable.
While I don’t know many people who are comfortable with the idea of losing money, conversely, we may regret that a potential opportunity has passed us by if we’ve been too cautious.
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.