Assessing Your Attitude to Risk

Jun

21

Whenever you are making significant investment decisions, assessing your attitude to risk will help any financial adviser build a picture of how you wish to invest your savings. They will also need to look at your time frames and goals for your money, but we’re going to focus on assessing the level of risk you find acceptable.

The key factors in whether or not an investment is suitable for you are:

  • Can you afford it?
  • Are you aware of the risks and implications of failure?
  • Are there outside factors e.g. volatility in the stock market or a changing exchange rate that will alter the value of your investments?
  • Are you comfortable with the level of anticipated risk?
  • Could you live with it should the worst-case scenario happen?
  • Are you comfortable with the estimated chances of success?
  • Are the potential rewards significant enough to mitigate the risks?

Evaluating Your Own Attitude to Risk

It is a common misconception that an appetite for adventure will be reflected in a similar attitude towards risk. We frequently encounter expats who have a strong sense of adventure but want to manage their finances in a much more risk-averse way. Therefore, it is more important to determine your attitude towards your career, business or your finances than how you spend your leisure time.

Your own attitude towards losing money is a key part of this discussion. Scientific research shows that, psychologically, the drawback of loss is not recovered by gaining the same amount. A great way to begin evaluating your attitude to risk is to look back at your past performance. Are you generally a saver? Do you take calculated risks? Or do you simply chase high returns? Equally, when you recall your previous monetary decisions, which do you remember most? By simply listing these in order of importance you will gain a greater understanding of your attitude towards risk, money and your investment history.

How Advisers Will Assess Your Appetite for Risk

An adviser will go above and beyond to gain a greater understanding of your appetite for risk when determining which investments are best suited to your personal style. They will also evaluate your financial circumstances and any linked individuals to determine if they believe you can afford the investment you are planning to make.

It is also worth noting that advisers will make a subjective analysis of your attitude to risk. They will take a look at those factors in the section above to gain clues and insights that will influence which investment vehicles they are prepared to recommend to you.

Our Forth Capital advisers will take you through a Risk Assessment questionnaire, which will provide an output score to indicate your position on the risk scale.

As qualified and knowledgeable professional advisers, they will also look at the bigger picture. They will evaluate the investment environment surrounding your upcoming investment decision, but also the timescales you are working to and the goals you have for your money. The adviser can then use the risk assessment questionnaire data, test your assumptions and provide information on the options you have. This information will then allow you to evaluate whether or not a risk is worth taking in direct comparison to the alternatives that are available.

Are You Comfortable with This Investment Decision?

This whole discussion is largely a matter of determining whether or not you are happy that the level of reward outweighs the risks of your investments. Once you fully understand the risks and rewards and your chances of success, you can use these to guide your monetary decisions.

Whilst it is recommended that you seek professional advice before committing to a larger or riskier investment, you can begin the process yourself by evaluating your own attitudes to risk, loss and money – a further option is to allow a Forth Capital adviser to take you through our own Risk Assessment questionnaire.

Trudi Hayes

The Author

Trudi Hayes

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