How much are you prepared to risk?
The outcome of the EU referendum was a reminder that risk comes in many forms, including political risk. Following the decision to leave the institution that has been a core part of our economic and political lives in one form or another for 43 years. We have also seen a change of Prime Minister in mid-term and a vote of no confidence in the leader of the main opposition party. On a national level, that's a lot of risk.
No one wishes to lose money on their investments, but most people are aware that for additional gain there is almost always increased risk. The primary goal of a strategic asset allocation is to create an overall asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon. Understanding your attitude to risk and capacity to absorb loss is key to investment planning.
The process of establishing your attitude to risk will start with you completing a risk questionnaire. A psychometric questionnaire can be a good way to check how you view investment risk. That's usually a starting point for discussion of the nature of investment risk and your attitude to it. The extent to which you are prepared to take on investment risk could range from being exceedingly cautious, through being prepared to consider a moderate degree of risk to being adventurous in your approach.
But it is also important to consider what is called your 'capacity for loss' - how much risk you can afford to take. This is the degree to which your personal circumstances and opinions will have an impact on the specific investment recommendations.
For instance, an investor may be willing to buy very risky investments but may have limited resources and a very short-term goal, for example to build up enough capital to pay for their children's school fees starting in four years' time. Their need to avoid risk because of their short time scale and modest means should outweigh their willingness to buy risky investments.
If you are having second thoughts about the basis of your investment approach, please ask us for a new risk review.