Skip links

Assessing your Investment Risk Tolerance

Before investing a penny, both you and your financial planner must agree on dealing with the inherent risk of investing.

However, many clients cannot communicate their attitude to risk because they have never thought about it and do not know the risks of investing.

What is investment risk?

We understand that even just the word ‘risk’ can sound daunting, but it’s essential to know from the outset that any investment involves some degree of risk, even if the risk is minimal.

The risk you take by investing is that the return on the funds invested will not be what you expect and that you may lose a portion of it.

But this risk does not mean you should not invest. Instead, before choosing the right investment option for you, you need to understand how much risk you’re comfortable taking and how this will affect your returns in the long run.

How is investment risk measured?

Experience is everything when it comes to investment risk.

Financial advisors can track historical behaviours and outcomes by analysing markets over time to make an informed prediction about how volatile the market is likely to be over a certain period. From this data, they can produce projected earnings. 

Based on this information, our financial planners can develop risk management strategies specific to your financial goals and attitude to risk. They are here to guide you through the financial planning process, building a long-term, professional relationship to make sure you reach your financial destination unscathed.

How much risk should I take when investing?

No matter how big or small, any financial decision or commitment carries an emotional weight.

We have all experienced this when considering making a large purchase. It is the feeling you get when you think, “Is this worth it, or would I rather keep this money for something else?”

So how do you quantify your attitude to investment risk if this is your first time investing? A useful exercise is “How much would I be comfortable losing?” It may sound defeatist, but this exercise gives you valuable insight into what type of investment and what level of risk is appropriate for you.

So take investing out of the equation and think about your current or savings account. Ignoring the apparent shock you would feel that money is missing, how would you feel if £500 was removed from the account? What about £1,000? £5,000?

If you keep going through these intervals, you will reach an instinctive point where the loss of that money would substantially alter your financial security and your lifestyle as a result.

Our financial planners will guide you through similar processes, using financial modelling, sensitivity analysis and their in-depth experience of investments. However, completing this exercise in advance of meeting your financial planner can tell us a lot about your comfort with risk.

What other things should I consider when investing?

Two elements are going to play important roles here – your financial goals and your current circumstances.

When you’re thinking about your financial goal, consider why you are trying to generate more income. How much money would you need? When would you like to reach this financial milestone?

By balancing these goals with your current incomings and outgoings, our financial planners can build an accurate plan of what financial moves you will need to make to achieve your goals, which will also affect how much risk you will need to take with your investments.

At this point, it could be that the risk is too much, and you have to reconsider your financial goal and how you will reach it. Perhaps there are other options open to you, and you could begin a financial journey that involves saving and investing.

By thoroughly examining your circumstances, goals, and attitude towards risk when investing, we can help form a financial plan that is right for you.

When should I speak to a financial planner about investments?

Speaking to a financial planner at any stage kickstarts the journey toward your ideal financial destination.

By having an honest conversation about your current financial situation, where you want to be in a certain amount of time, and your tolerance of risk, we can help you assess whether investing is the right move for you and your current circumstances. 

Contact us to arrange a no-obligation consultation with one of our experienced financial planners to determine if it is time to invest.