With so much uncertainty out there, people are quite rightly thinking about every decision made. Sometimes even holding back on non-essential expenditure in order to keep savings or build on savings just in case.
These decisions are all based on you weighing up the pros of buying that TV vs the risk that you may need the money soon. This simple decision has lots of moving parts to it and is affected by your past decisions and experiences, as well as other considerations. You are assessing risk.
In my day to day job role as a Financial Adviser I see these decisions playing out every day. Yet why is it that when I look at client’s investments or pensions, they rarely match risk preferences?
The money that you invest in your pensions and in other investments is often some of the most important and replied upon money you will ever have. As for example if you had no pension, could you live on a state pension of around £700 per month? Let alone a lifestyle.
So why aren’t we regularly considering the above aspects, and risk that we are taking with our money as there is always uncertainty or events that could affect the value of your money either positively or negatively.
The answer to this is normally that after taking out the plan the paperwork is put in the draw and never been thought about again. This is dangerous as life changes over time, so do our thoughts and feelings towards things. We review various other aspects of our lives like our home energy supplier on price comparison websites, yet this is unlikely to ever be as important as our pensions and investments will be.
What is the basic principle of risk?
Generally, the more risk the greater the potential for reward and losses.
The less risk, the lower the potential reward and losses.
This does not mean cash or less risky investments do not carry different risks, like getting eroded by the cost of living, but at least with cash for example your capital is secure even if the interest you receive is low.
If we apply the above principle of risk vs reward, depending on the level of risk you are taking with your money will depend on how your investment will react to the uncertain events as they arise.
Therefore, it is so important that your investments and pensions match the level of risk you are willing to take. Yet many investments and pensions I look at are not aligned to the level of risk the individual is willing to take.
Risk is such a personal thing and means different thing to different people.
Why is this so important?
The answer to this question will depend upon the goal, source of the money and time frame until you need to access the money. All these aspects will interact and work together and affect each other and need to be considered alongside other aspects like past decisions you have made with money and if you can afford to risk the money and if so to what degree.
The impact of getting risk wrong could mean not being able to retire when planned, or that you must reduce the lifestyle you would like to lead in retirement. These are just a few examples of a long list.
However, the above does mean that it is perfectly possible to have different risk appetites with different pots of money. This is rightly so, if you are 30 years from retirement you may be able to afford to take more risk with your pension than the savings for a house deposit in 3 years’ time.
Another important part of all of this is that people’s attitude to risk changes over time. This could be that you have inherited money which means you have more money than you need and can afford to lose it. The other side to this could be as you approach retirement you may have saved enough money to cover your retirement needs, but any drop in value could mean you could not live the retirement you wish. In this scenario you may wish to lower the risk take with this money.
There is a lot to consider when looking at risk and seeing clients that have investments that do not match their goals and risk is always a concern for me. But with planning and understanding the risk you are taking with your money this burden can be suppressed.
How can an independent financial adviser help?
A good financial adviser will help you navigate the above and make sure they put the best plan in place to reach your goals. They will also look to review this on a regular basis and can adapt the plan if needed. They cannot guarantee outcomes or wave a magic wand but the earlier you talk to a professional the sooner you can know that there is a plan and goal in place.
Financial advice is not for everyone and if you really feel like you do not need any that is fine at least you are now thinking about the risks with your money.
If you feel you would like to talk to one of our advisers about any of this, please do contact Temple Wealth and we will be happy to help. You can send a message to our Facebook or Contact Us page, or call the office on 01329 282882.