Understanding your attitude to risk

When making an investment of any kind, it’s important to understand what level of risk you are comfortable with. Investments will fall as well as rise; are you prepared to risk a large, medium or small proportion of your money to invest? Are you happy to take calculated risks in the hope of securing a higher return in the long run, or would you prefer to play things a little safer? At Equilibrium, we can help you to better understand your financial position and assess the level of risk you should take when making investments.

Different people have different attitudes towards risk and it is important you understand what your level is so that you can build your portfolio to suit this. Only you can judge what level of risk you are comfortable with, but our experts are here to provide the guidance and support you need to ensure you are best placed to make a decision.

Establishing your approach to risk

At Equilibrium, establishing your attitude to risk and the level of risk that is appropriate for your circumstances is an essential part of our process. The risk you take is linked to your investment objectives, so we will assess the level of risk that should be taken to achieve your objectives for any investments that Equilibrium manages by considering your:

• Knowledge and experience
• Capacity for loss
• Tolerance
• Need for risk
• Desire for risk

Knowledge and experience

One of the factors we take into account is the knowledge and experience that you have in investing your money. This will influence how confident you feel when making investment decisions and how nervous you are at times of high market volatility.

Capacity for loss

The next aspect we consider is your capacity for loss. This is a general assessment of your personal financial situation and the impact that losses could have on your standard of living.

The following explains how we classify this.

• High – You would tend to have significant excess capital or high levels of guaranteed income, and your standard of living would not be affected by losses on your investments and how you would feel would not change.
• Medium – You would tend to have enough flexibility with capital or income to adapt to reasonable market volatility. The impact of losses may mean that some short-term changes are needed to non-essential expenditure regarding your standard of living, and you would tend to feel uncomfortable while market volatility continues.
• Low – You would tend to have a high dependency on your capital or income that may only just meet the desired expenditure. With regard to the impact of losses, major changes may be required to expenditure and you would feel outside of your comfort zone.

Tolerance

We use the FinaMetrica risk profiling service to measure your risk tolerance. Every client is asked to complete a questionnaire to determine their personal risk tolerance score.

Your answers from the questionnaire are then compared to a representative sample of the investing population. The results can also illustrate how you may differ from other individuals in the same risk group, which will help your adviser to understand how you view risk.

The outcome of assessing your risk tolerance is to match your score (or joint scores) to our strategic portfolios to determine your tolerance portfolio. This will be the highest risk portfolio that you could hold without feeling uncomfortable. When recommending the portfolio in which you should actually invest, our approach is to use the portfolio that meets your objectives at the lowest level of risk. This means that in normal market conditions your tolerance portfolio is generally not the portfolio we will recommend for you if a lower risk portfolio meets your needs.

For joint clients, such as spouses, we prefer each individual to complete the risk questionnaire. Once the scores are known, we will either use an average of the scores or alternatively agree to use one of the scores as the measure of risk tolerance. Where scores differ significantly, this can sometimes mean that the individual with the lower score could potentially be uncomfortable with the portfolio we recommend. Your adviser will indicate if this is likely to be the case and discuss how this might affect how decisions are made.

Need for risk

Your need for risk is a very important factor in determining the portfolio into which you should invest. This is the level of risk that you actually need to take in order to meet your investment goals. It is often lower, but can sometimes be higher than your risk tolerance. We will assess this on a regular basis as part of our ongoing service and adjust the target portfolio as appropriate.

Desire for risk

At the same time as we are assessing the above factors, you are also likely to be reflecting on your personal views in this area. Your adviser will talk to you about your desire for risk as this could influence our recommendations and how comfortable you feel with your investments as a result.

Why choose Equilibrium?

Equilibrium is a national, award-winning financial planning company with over 25 years of experience in making people’s lives better. We are perfectly placed to help you calculate your attitude to risk and to help you decide on the right investment strategy to meet your short and long-term objectives. We will work alongside you to create a bespoke plan that matches your goals, personality and your true attitude to risk.

Get in touch

If you would like to learn more, simply fill in the contact form below and one of our friendly experts will be in touch.

The information contained within the website should not be looked upon as advice or recommendation. Clients should seek appropriate guidance from their financial planner.