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Understanding Risk

We are all concerned about financial risk, in other words the risk associated with investing in certain investment types and the potential returns from those investments.

Generally the amount of risk you take is linked to reward.

It is important to understand the level of risk you are prepared to take with your investments. To get your view on risk we will need to understand a number of key factors:

investment-objective

Your Capacity to Take Risk

Your attitude to risk is only one factor in determining your risk profile and a suitable investment strategy. Potential loss must also be considered in relation to your financial objectives.

Your Need to Take Risk

You may not be comfortable with taking any risk with your investment, but there may be a need to take some risk to meet your objectives. Your financial adviser will discuss and explain the implications.

The Risk Profile

1. Risk Averse

Risk averse investors prefer knowing that their capital is safe rather than seeking high returns. They are not comfortable with the thought of investing in the stock market and want to keep their money in the bank.

Risk averse investors typically have very limited knowledge of financial matters. They are unlikely to have experience of investment.

Risk averse investors can take a long time to make up their minds on financial matters and will usually suffer  from severe regret if their decisions turn out badly.

Risk averse investors typically hold all of their money in cash deposits.

Risk averse investors need to be aware that their unwillingness to take any risk with their money may mean that the value of their savings does not keep pace with rises in the cost of living (inflation).

2. Conservative

In general, conservative investors prefer knowing that their capital is safe rather than seeking high returns. They are not particularly comfortable with the thought of investing in the stockmarket and would rather keep most of their money in lower risk assets.

Conservative investors typically have fairly limited knowledge of financial matters. They are unlikely to have much experience of investment.

Conservative investors can take a relatively long time to make up their minds on financial matters and will usually suffer from regret if their decisions turn out badly.

3. Balanced

In general, balanced investors prefer not to take much risk with their investments, but will do so to an extent. They prefer lower risk assets, but realise riskier investments are likely to give better longer term returns.

Balanced investors typically have modest levels of knowledge about financial matters. They may have some experience of investment in riskier assets.

Balanced investors can take some time to make up their minds on financial matters and can often suffer from regret when decisions turn out badly.

4. Moderate

In general, moderate investors understand that they have to take investment risk in order to be able to meet their long-term goals. They are likely to be willing to take risk with a high proportion of their available assets.

Moderate investors typically have a degree of knowledge about financial matters. They usually have some experience of investment, including investing in products containing higher risk assets such as equities.

Moderate investors will usually be able to make up their minds on financial matters relatively quickly, but still suffer from some feelings of regret when their decisions turn out badly.

5. Dynamic

In general, dynamic investors are happy to take investment risk and understand this is crucial in terms of generating long-term return. They are willing to take risk with most of their available assets.

Dynamic investors typically have quite high levels of financial knowledge. They will usually be experienced investors, who have used a range of investment products in the past.

Dynamic investors will usually be able to make up their minds on financial matters quite quickly. While they can suffer from regret when their decisions turn out badly, they are able to accept that occasional poor returns are a necessary part of long-term investment.

6. Adventurous

In general, adventurous investors are looking for a high return on their capital and are willing to take considerable amounts of risk to achieve this. They are usually willing to take risk with all of their available assets.

Adventurous investors typically have high levels of financial knowledge. They often have substantial amounts of investment experience and may have been active in managing their investment arrangements.

Adventurous investors typically will make up their minds on financial matters quickly. They do not suffer from regret to any great extent and can accept occasional poor returns without much difficulty.

Your Attitude to Risk

To understand your attitude to risk, we will take you through our independent risk profiling tool. We will ask you to respond to a series of 12 statements which help to understand your overall willingness to take risk.

You will be asked to respond to the statements with either:

Strongly Agree
Agree
No strong opinion
Disagree
Strongly Disagree

The profiler will place you in a risk category based on your answers. This risk category is the starting point for you and your financial adviser to discuss and agree the correct risk category for your investment.

The 12 Statements are as Follows:
  • People who know me would describe me as a cautious person
  • I feel comfortable about investing in the stock market
  • I generally look for safer investments, even if that means lower returns or both?
  • Usually it takes me a long time to make up my mind on investment decisions or both?
  • I associate the word risk with the idea of opportunity
  • I generally prefer bank deposits to riskier investments
  • I find investment matters easy to understand
  • I’m willing to take substantial investment risk to earn substantial returns
  • I’ve little experience of investing in stocks and shares
  • I tend to be anxious about the investment decisions I’ve made
  • I’d rather take my chances with higher risk investments than increase the amount I’m saving
  • I’m concerned by the volatility of stock market investments.
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