The importance of assessing attitude to risk

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

We are all experiencing change at the moment, whether that is a change to the cost of living, change in legislation or a change in how we approach our attitude to risk.

The latter may seem fairly low down the list of things to worry about at the moment but the ongoing assessment of someone’s risk profile is essential. Over time things change, we get older and therefore may be more reliant on the funds we have invested.

Over recent months I have had many clients contacting me about the performance of their funds but, after discussion, very few have actually made any changes. This is because, as part of either my initial recommendation to the client or their ongoing review, we discuss their approach to risk in detail and take account of any possible ‘market shock’ scenarios.

When looking at an individual’s ability to cope with any sudden financial losses, there are two main aspects to consider. One being, can they cope financially if the value of their investment was to fall? If a sudden loss in value impacts upon the standard of living this needs to be taken in to account and probably a lower risk profile selected.

The other aspect is the individual’s emotional ability to cope with the potential volatility of their investments. Someone could have a substantial amount of wealth but if they are lying awake worried about the performance of the markets this could mean they are not able to cope emotionally with a high level of risk as this is associated with greater volatility.

In order to assess attitude to risk we ask the client to complete a risk questionnaire, the outcome from which provides a useful starting point for further discussion. Using the data we have available we look at the various risk profiles and the impact that different returns can have on the client’s overall wealth. We then assess how this may affect them achieving their financial needs and goals. Discussing our results with the client, we then agree the most suitable risk profile, in terms of both financial and emotional capability, for them.

Taking the time to understand an individual’s approach to risk and feelings around the ups and downs of investing helps us to ensure they are invested appropriately. Whilst this may not guarantee a good nights’ sleep, investing in the right risk profile means the level of expectation of the highs (and lows) is fully understood by the client.

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26 Apr 2024

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