Risky business: why better understanding leads to better decisions

By James Peer, Independent Financial Adviser

But risk isn’t just related to investment returns; it’s much more than that.

To take this one stage further, we refer to ‘capacity for loss’, which is an objective assessment of the risk a client can actually afford to take.

Anybody thinking of investing needs to consider how they would feel about losing part of their investments during times of volatility, or even a ‘market correction’. Would this impact your plans or standard of living?

Prudent planning

Of course, prudent planning means having cash available for short term needs and sound investing means that any short term loss should have time to recover when considered against your overall goal.

Trusting your long term portfolio

Having that financial cushion to withstand riskier times comes hand in hand with having the psychological ability to trust that your portfolio is built with risk in mind and this is where understanding your goals is important.

What are your investment goals?

Setting goals is fundamental to understanding what risk you’re willing and able to accept in relation to your investment portfolio.

Clients often have a number of investment goals with different time horizons, in which case risk can be considered separately for each investment.

You may want to:

• Keep up with inflation, thus avoiding cash losing value in a bank account, or
• You may be funding retirement with a need for regular income over 20 years or more.

A lower risk investor may be comfortable with a higher risk portfolio for the achievement of a long term goal, knowing that the extended time frame mitigates the impact of short term volatility.

Things change

As with financial planning goals, your risk profile may change so it’s important to have regular reviews with your adviser, helping to ensure your portfolio delivers a successful investment experience.

Finally, such is the importance of understanding risk, any investment comes with the following disclaimer:

'As with all investing, your capital is at risk. Past performance is not an indicator of future results and future returns are not guaranteed’.

Only through treading a carefully managed pathway can you ensure your goals remain attainable. Of course, risk is built into your financial plan from the outset, so to find out more or discuss your existing risk profile, don’t hesitate to contact us.