Risk Tolerance

There is always risk in life whatever you do, never more than when you are looking to invest money. Saving and investing involves a variety of risks, for example there is a risk that your money may not keep up with rising prices (inflation risk); there is a risk that comes with the value of investments going up and down (volatility risk); there is a risk that an institution could fail (default risk) – a recent example is Northern Rock Plc; and the risk that you could have earned better returns elsewhere (interest-rate risk).

The aim should always be to strike a balance between these different risks. What is a good balance for you will depend on:

  • your personal circumstances – how much you can afford to lose (your capacity for loss)
  • your investment goals, time frame and dependency on investment returns
  • your personal attitude to risk

Taken together these make up what’s called your ‘risk appetite’. Of these three factors, your capacity for loss and your investment goals are most important. Personal attitude to risk is hard to measure and can be changeable, what feels comfortable one day may not the next. It is therefore important to consider the repercussions in the event that you did lose part or all of your savings or investments. How could or would such a loss affect your financial stability in the short and long term?

We have been helping our clients to grasp the importance of understanding that differing forms of risk are always present when it comes to financial planning – as with anything else in life, such as crossing the road. However, we endeavour to understand your investment return requirements as well as your individual capacity for loss and we will work with you to ensure that we understand as best as we can your changing attitudes as time progresses.

The value of your investment can fall as well as rise and you may not get back the value of capital that you invested initially.