3 Important Things To Consider About Investment Risk

3 Important Things To Consider About Investment Risk

The biggest risk is not taking any risk… In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”– Mark Zuckerberg

People often ask me this question – “where should I invest my money”? The simple answer is there isn’t a simple answer!

I always start by asking people why do you want to invest?  There are many reasons, for example to help fund children’s education fees or it may be to retire 5 years early.  Once we have identified the goal we can then discuss risk.

 

Risk is a term which is often used, but not always well understood. Whilst we all hope that the value of investments will go up, the reality is that they can rise and fall and it is clearly the size of the fall that normally creates the greatest concern.

Generally speaking, the higher the risk, the higher the potential return and the higher the potential loss.

If you are considering investing a regular amount each month, a lump sum or reviewing your pension fund investments you should consider the following 3 things:

  1. Your Attitude to Risk – this is a measure of your willingness to take risk and is normally assessed by way of a risk profiling questionnaire.  The results of the questionnaire mark the beginning of the conversation about risk and are not set in stone.  How you feel on any given day can influence your approach to risk, what feels comfortable today may not feel as comfortable tomorrow.  It is important to not get carried away with current events, for example, rising stock markets can influence us to take more risks
  2. Your Risk Capacity – this differs from your attitude to risk and explores your ability to take risk.   Generally speaking, the higher your level of wealth relative to liabilities, and the longer the investment time frame, then the greater the ability to take risk.
  3. Your Need To Take Risk  –  if you your goals are modest then you could avoid taking too much investment risk.  However, if you have a low risk profile and have demanding investment goals something will have to give. You will either have to revise your goals or take additional investment risk in order to achieve them.

If you approach your own personal financial goals by addressing these 3 points you will find it much easier to plan for the future.

If you would like to find out more about investment risk and how it can help you achieve your goals please feel free to contact us.  We would be delighted to speak with you.