You’ve saved up quite a bit of money and don’t intend to make any expensive purchases. Then, why not think about investing it at the right place? Investments are an effective way of multiplying your pounds by twice, thrice and even ten times! Many people in the UK believe in investing and look at products like shares, property and fixed interest securities. It’s a fact that there are always bad decisions. Investment risk may be low or high, depending on the type of financial product and the economy. While we have no control upon the latter factor, we can definitely compare our options and choose wisely. Investing into different asset classes can lower the chances of losses when one asset performs better than the other.
Based on you as an individual, you need to analyse an investment product on the basis of its volatility. Follow these three steps to find an answer to the question, “How much risk should I take with my money?”
What Is Risk Appetite?
In simple words, this is the degree of risk you can comfortable take on. It varies depending on three factors:
- The way you look at risk- this is on the basis of your financial conditioning
- Your goals in relation to investments, personal time frame and need for returns on your pounds
- Your own circumstances- how much you can afford to lose
Investing is a potential minefield of inaccurate predictions. You automatically go in for the following risks:
- An institution will go bankrupt (default)
- Your money not keeping up with rising price levels (inflation)
- Share prices rising and falling (volatility)
- Another product giving better returns (interest-rate)
Taken together, these factors make up your risk appetite. The aim is to strike a fine balance between the three factors above. Most important are your investment goals and how much you can afford to invest without worry. Whether you believe the forecasts doing the rounds is subjective and changes from time to time. It’s basically a psychological factor.
How Do Financial Advisers Assess My Risk Appetite?
Almost all financial advisers assess your financial circumstances before recommending investment deals. They may use a questionnaire for this purpose.
How Can I Assess My Risk Appetite?
You can use the following steps…
- Know the amount you can afford to lose:
Investing everything that you owe would be foolhardiness. There should also be a little emergency money for a rainy day. Some might be able to afford losing a few pounds, while others a few thousand pounds. It depends wholly on your circumstances. If you have financial commitments or children to look after, it’s wise to invest in low-risk products.
- Analyse your goals and timelines carefully:
Your goals and timelines largely affect your saving and investing choices. The bigger your goal is in terms of income you want to invest, the greater the rate of return should be to beat inflation and achieve that goal. Avoiding fluctuating prices may lead your goal to impossibility. At the same time, investing mindlessly means your investment flows down the drain. If you have a short-term goal like buying a car, the best way to invest it is in cash products. This way you won’t be worrying about the bull market when you need ready money. If you’re looking for returns in the long run, shares have a better chance of giving inflation-beating returns. A decent amount of volatility risk for the benefit of higher returns is acceptable. As the long term goal approaches, for example your wedding, start moving into relatively stable assets to ‘lock-in’ gains.
- Understand your attitude towards risk:
Our outlook towards risk is largely a psychological factor. From childhood, we’ve been told, “Don’t take risks!” or “Take risks if you know what you’re doing”. It can also be influenced by what’s happening in the economy and financial market. Most people stick only to ‘safe’ investments to prevent any chance of losing money. Yet, exercising too much caution may turn your investments unprofitable. Spread out risk. Don’t place your hopes on a single asset that may underperform.
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