Attitude to Risk

This is a very personal issue. Even perception of risk differs between investors, so individual risk profiles that identify acceptable investment for an investor, can vary enormously.

Firstly there is no such thing as No Risk and risk is generally proportionate to potential return. Risk can be broadly separated into non investment and investment risks.

Inflation risk - reduces the value of money (non investment risk)

Volatility risk - change in the face value of investment whilst invested (investment risk)

Capital risk - loss in value returned to an investor (investment risk)

Cash has only non investment risk - inflation. It has no Volatility risk (it doesn’t fall in face value) and low Capital risk (it is broadly secure from total loss).

Low risk is rewarded with low returns, creating inflation risk.

Shares are exposed to greater investment risks but are generally low inflation risk assets.

The four ‘variables’ in creating a portfolio all have their own risks:

• Amount invested
  Too much removes funds from other purposes,
• Rate of return
  Low return underachieves the aim. High return implies excess risk
• Investment Term
  Too short exposes volatility risk
• Final value
  Too low and the investment fails!

We believe in spending time reviewing risk, in terms of investment and non investment risk.

The important point is to agree some risk descriptions, only then can we advise on appropriate investments to individually or collectively match a client’s particular objectives. We believe ‘benchmarking’ (identifying a suitable reference to compare against) is an important part of risk profiling. Our risk profiles include our view of suitable investment reference points.