Investors now have a much wider range of investment choice open to them than ever before, ranging from the US stock market to the value of the euro versus the Japanese yen, the price of commodities such as oil, German government bonds and a whole range of other securities. For the non-professional, attempting to devise an appropriate investment strategy with all of these options and choices available can be a daunting task.
It is widely understood that higher investment returns are accompanied by higher risks. While we might dream of making a killing on the stock markets, however, we might not want to risk our hard earned cash on high risk strategies. Fortunately there are now some quite useful and necessary tools available to assess an individual’s risk appetite to ensure they don’t find themselves outside their comfort zone.
There are three key elements that feed in to an investors profile and risk tolerance with regard to the investment strategy required.
- Attitude to Risk
Attitude to Risk
This deals with the individual investors own risk attitude and/or their tolerance of risk.
“How can I emotionally handle moves in the value of my portfolio?”
Are you likely to panic, for example, if there are significant downward movements in values? On the other hand are you a bit of a gambler and feel you can take on lots of risk and volatility in order the achieve high returns? To get the balance right the attitude to risk then need to be co-related to requirement and capacity, bearing in mind that in most cases taking some level of investment risk is key to higher investment return.
Here the need is to focus in on what is the objective of any investment. If, for example, the investor has €200,000 and wishes this to grow to €300,000 over 10 years this is probably achievable without too much risk. On the other hand if the need is to do this over 3 years then history shows us what short-term volatility can do to an investment over that period. In addition an individual’s requirement when it comes to investing a capital sum for example could be quite different to the same individual’s requirement for his pension scheme. In the first case the time horizon may be quite short while for the pension you are probably looking at a longer term.
This is perhaps the most important consideration of the lot and deals with the individual’s ability to take the financial risk.
“If this investment lost a significant amount of its value would it make a material impact on my financial position?”
Capacity is particularly important for individuals taking on higher levels of risk obviously. Risk tolerance and appetites change over time and can actually change very quickly. It could be a significant inheritance or business success that changes circumstances for the better or when it comes to pension planning it will be necessary to calibrate risk capacity the closer the person gets to retirement. Suffice to say that there are strategies to suit each circumstance and it is vitally important you review risk tolerance regularly.
Aidan Wall has been providing impartial and unbiased investment and pension advice to clients at all stages in the their lives since 1983. If you would like to talk to Aidan about a lump sum investment or pension fund please call 046 924 0961 or email: firstname.lastname@example.org
At Lifetime Financial Planning we also conduct regular reviews of your investment / pension fund performance, which we believe are the key to ensuring your chosen fund(s) can meet your expectations.