How to measure your appetite for risk as an investor, and why it matters

21 June 2024

Are you a risk-averse person, or do you seek a thrill every now and again?

Everybody is different – some love to ride the scariest rollercoasters, while others gain enjoyment from more peaceful activities. While neither is wrong, your preferences will inevitably affect the way you live your life, influencing your relationships, your career choices, and importantly, your financial behaviours.

Indeed, you might not realise it, but almost every financial decision you make involves careful risk assessment.

Almost every day you might ask yourself: “Will this choice put my finances at risk, and if so, are the potential rewards worth it?” This act of risk calculation could range between purchasing concert tickets on a whim to buying a property with months of planning first. In any case, you probably do it more often than you think.

When you’re investing your money, you will likely be exposing your wealth to some level of risk.

As such, working out your appetite for financial risk is a cornerstone of long-term investing, but many people don’t take the time to fully examine theirs.

Here’s our guide to working out your appetite for risk, and why it matters for investors.

First, think about your overall attitude to risk

Although it may sound trivial, thinking about your overall attitude to risk could help you to determine how you’ll feel when investing your money.

You could start by asking yourself questions such as:

You might not immediately realise how this translates onto investing behaviours, but remember, you can’t control how the market behaves.

So, if you are easily stressed by changes that occur outside of your control, you might not be best suited to a higher-risk investment proposition. On the other hand, if you’re ready to take risks in pursuit of gaining more later, you could be aligned with a higher-risk proposition (if managed by a professional).

Remember, too little risk could also put your wealth in a less favourable position. Lower-risk investments often perform less impressively, meaning that your money may not grow in line with, or faster than, the rate of inflation. If this happens, the real-terms value of your money could be eroded over time.

With all this in mind, it may be worth striking a balance that keeps your stress levels to a minimum while maximising the potential for returns where you can. If you’re unsure where to begin, a financial planner could help you find your happy medium for risk.

Next, assess your investment goals (and the time frame over which you want to achieve them)

Remember that investing does not occur in a vacuum – everyone has their own personal reasons for making investments.

For example, if you have adult children that have only recently begun investing, their top goal might be buying a home. According to Lloyds Banking Group, more than one-third of Gen Z investors say their number one reason for investing is so they can buy a property.

If you’re approaching retirement, your ambitions may be a little different.

Imagine you’re expecting to retire in the next five years. Over the course of your career, you’ve been regularly buying shares within your Stocks and Shares ISA, with a view of liquidating a small portion of these assets each year to top up your retirement fund.

This means that your investment time frame may substantially shorter than that of your Gen Z children or grandchildren. And, any market shocks that happen in the next five years could affect the cash value of your assets when you begin to sell them off in retirement.

This is just one example of why assessing your goals and desired time frame is so important: these elements will help to inform the level of risk you’re willing to take.

Ask a financial planner to help you manage your investment portfolio

Putting together an investment portfolio that is in line with your goals, matches your attitude to risk, and is fully diversified, can be challenging without professional guidance.

A financial planner will guide you through:

Our seasoned investment experts are here to help. Email or call 0161 8080200.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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