Understanding your appetite for risk is key when you are considering an investment strategy. Risk profiling is the process that we use to find 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 investment decisions, assessing your attitude to risk will help us build a picture of how you wish to invest.
1. 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 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, or do you take calculated risks? Some people just simply chase high returns, yet others will not risk their capital under any circumstances. Many of course will just sit in the middle.
2. 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 25-year-old has a longer period of time over which they can invest than a retiree. 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. Markets will always have bad years and good years, 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 in just a few years and are more unlikely to want to take risks on their capital over that short period. Their risk profile would be more likely to be on the cautious or cautious to balanced side. We do all differ of course.
3. How we will assess your appetite for risk
We ensure we gain an understanding of your appetite for risk when determining which investments are best suited to you. We will evaluate your current financial circumstances, looking at the bigger picture and reviewing the timescales you are working to and the goals you have for your money, such as retirement requirements etc.
We will take you through a risk profile questionnaire, which provides a score to indicate your position on the risk scale – cautious, cautious to balanced, balanced, balanced to adventurous or adventurous. To suit your feelings towards risk tolerance this can then be moved up or down to a level you are comfortable with. You need to be happy that the potential level of reward outweighs the risks of your investments. It is important that you fully understand the risks and potential rewards.
We recommend that you seek advice from a regulated financial adviser before making any investment decisions.
Contact one of our advisers to take you through our risk-profile questionnaire by emailing:
enquiries@bgwealthmanagement.net
