Understanding your own Appetite for Risk
Understanding your appetite for risk is key when considering an investment strategy. Risk profiling is the process of finding your correct level of investment risk. This takes into consideration your risk capacity and risk tolerance. Risk capacity is the level of financial risk you can afford to take, and risk tolerance is the level of risk you’re comfortable with.
When 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.
Start by Looking at your General Attitude to Money
Your own attitude towards losing money is a key part of determining your appetite for risk. Most people are obviously not comfortable with the idea of losing money. However they may regret it if they’ve been very cautious with their long term investments and if they have not produced the required returns.
One way to evaluate your attitude to risk is to look at how you behave towards money in general. Are you a saver? Do you take calculated risks? Some people simply chase high returns, yet others will not risk their capital under any circumstances. Many of course, sit in the middle.
Your Investment Timeframe
Your tolerance for risk is likely to change throughout your lifetime, so your investment timeframe is linked to this. For example, a 30-year-old has a longer period of time over which they can invest than a 65-year-old. They may therefore be more likely to be an adventurous investor. The longer the timeframe, the more likely any short-term losses can be tolerated because they will still have time to recover. Stock markets will always have bad years as well as good ones, and longer-term investors will have much more time to ride the wave.
Someone older who is nearing retirement will generally be more interested in capital preservation rather than growth. They may need to access their funds within just a few years and are unlikely to want to take risks on their capital over that short period. Their risk profile would be more likely to be cautious or moderately cautious.
How Advisers will Assess Your Appetite for Risk
A good adviser will ensure he or she gains an understanding of your appetite for risk when determining which investments are best suited to you. They will evaluate your current financial circumstances, looking closely at the bigger picture and will review the timescales you are working to and the goals you have for your money, such as retirement requirements and education planning.
Advisers at Forth Capital have access to sophisticated software tools to analyse your risk profile. We will take you through a risk profile questionnaire, which provides an output score to indicate your position on the risk scale – cautious, moderately cautious, moderate, moderately adventurous or adventurous. Your adviser will then analyse your situation and your appetite for risk and recommend an appropriate strategy to match this.
Are you Comfortable with this Investment Decision?
You need to be 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.
It is recommended that you seek professional advice before making investment decisions. Contact a Forth Capital adviser to take you through a Risk Assessment questionnaire by clicking here or call +41 22 311 1441.