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Tim, there appears to be glimmers of hope to the equity markets and I am considering making an investment. However, the spectre of investment risk remains ever present in these turbulent times. How do I determine what my appetite for risk and locate the risks before parting with my money?

- Charles

 

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Charles, this is the conundrum that all investors have to contend with so do not feel isolated with your dilemma. One of the first questions you will have to ask yourself will be the impact of any losses will have on your day to day life. If there are, then it is likely that you are committing too much from your budget. Determine a comfortable level of investment and one that you can hold in place for some time; your investment horizon should be at least 5 years. This is unless you are a day trader which if you were you would not be asking me this question.

One other main factor that also determines your risk profile is how far away you are to retirement. Typically you should be reducing your exposure to riskier investments the closer your approach retirement so that you limit the down side to your capital. This would reduce potential downside losses which may be difficult to recoup purely on the basis you do not have the time, revenue or assets to replenish. An oft quoted rule of thumb is that the proportion of you retirement fund allocated to equities should be 100 minus your age. Your focus in retirement is generally towards creating income and not generation of capital with the associated risks.

There is no way of over simplifying of creating a complex algorithm to determine your risk. While many have tried and many regulators demand some form of risk assessment to have been carried out when probing the methodology of advisers, there is a flaw. We are humans and by dint of that fact we all have totally different interpretations of the meaning of risk. How we live, work and our expectations are all different. For example, a salaried individual may be content with the size/risk profile of their portfolio to achieve their financial goals. Whereas, an entrepreneur/business owner while in the same position may look for extra wins and take on extra risk.

Ultimately, a discussion with a professional Wealth Manager can assist you in determining what is likely to be your position in the risk/reward tug of war. Moreover, they can proffer some guidance on where one should be looking to place monies giving a full risk management service on how to protect your money not only from falling markets but other factors too. Consider business and taxation risk with a view to ensuring your objectives are reached for your family in the event of your impaired health or demise. Protecting downside and tailoring a solution that fits you is key since, as I said before, we humans are all very different.