Independence and Clarity Of Aim
Every investor must work out their tolerance to risk, and adjust their portfolios accordingly, as well as regularly review their stance to reflect changing life circumstances. But too much risk aversion could mean making poor investment choices. Here’s why.
According to the last survey the UK public about investing, a massive 61% said their financial risk tolerance was low risk and they would not be comfortable with making investment losses. Just 4% said they’d have a high financial risk tolerance and would be comfortable seeing large fluctuations in their wealth, while 23% described themselves as having medium risk tolerance, whereby they’d be comfortable with seeing some fluctuations in wealth.
However, when the survey asked whether short-term investment losses or not achieving longer-term financial goals would be of most concern when investing, 68% said not achieving long-term financial goals and 32% short-term investment losses.
There are many online calculators you can now use that illustrate the potential impact of different risk approaches on a long-term portfolio. Use this calculator, enter an initial deposit, a monthly contribution, a target amount, and the target time frame in years, and then use the risk appetite slider to see the potential impact of different approaches.
Every investor can, and should, manage their investment risks. There are simple rules to follow when doing this:
• Always remember that investing is for the long-term. You are at risk of getting back less than you invest, but historically returns over the longer term have been positive.
• Explore and fully understand your risk tolerance. As a general rule, the further away from your investment target you are, or the further away from retirement, the more risks you may be prepared to take.
• Diversify your investment portfolio. Professional investment advisers and robo-advisers will create investment portfolios for you based on your risk tolerance and investment approach. If you take the do-it-yourself route, ensure you also diversify.
• Do drip feed contributions into your investment pot to help smooth your returns. Regular investors can benefit from what is known as dollar cost averaging, in which short-term falls in the market are actually to be welcomed, as they enable you to buy more shares at a lower cost.