What is an attitude to investment risk?
If you’ve ever taken advice, or used online tools to invest within an ISA or pension, you’ve probably heard the term ‘risk profile’. This is a term so common in the advice industry that we forget it’s not a term that most have encountered before.
By investing money, you are taking some investment risk. How much investment risk you’re taking will depend on your assessed ‘risk profile’.
Risk Profiling Questionnaires
If you take financial advice, your adviser will walk you through a risk profile questionnaire. This is a psychometric quiz to help decide how much investment risk you’re prepared to take with your money.
A good risk profile questionnaire will not only consider your personal attitude to money, but also the amount of time your funds will have in the markets, and whether you plan to generate income. Your attitude to investment risk is essentially the amount of volatility (the ups and downs) you can suffer on your investment journey.
Types of Investment Risk Profile
If you’re the sort of person who would worry at the point of an investment loss, you likely have a ‘cautious’ risk profile. If you would absolutely not tolerate investment fluctuations, you’re ‘risk averse’.
Investment risk for pensions
In all likelihood, a novice pension investor would find themselves with a ‘balanced’ risk profile. This is because, particularly with pensions, you’re prepared to invest your funds under a reasonable mandate, to make steady growth. Investing pension funds is quite different from investing your cash.
Pensions can’t be opened before minimum pension age (55 years). This means pension investments have a good time in the markets to ride volatility. If you wanted to invest some money from the bank, but need short-term access – you absolutely shouldn’t be investing in the markets, no matter what your risk profile. Short term volatility could mean a dip in value at the point you need your money back; that’s when investors lose out. Investment markets are unpredictable as influences on the markets cannot be controlled (ref. Covid-19!)
Should I just go for balanced?
A balanced risk profile fits most people. Balanced portfolios should be highly diverse in terms of investment assets and geographical spread. A balanced investment should, however, still have a minimum investment terms of 3 years.
Those who can afford to take a high risk with their money probably don’t have to – as they’re already wealthy. Those wanting to take high risk might not be able to afford to, as a large loss could affect their financial security. That’s often why we see a lot of balanced risk profile results.
To find out more about your risk profile, get in touch. We can send you some of the tools professional advisers use!
