Market Crash, Recovery, Changing Investment Risk and Tolerance to Loss

Published / Last Updated on 22/03/2021

In discussions with you, we will talk about your financial and tax position, your needs, requirements and goals as well as your attitude towards risk, your investment experience, your thoughts on environmentally friendly, socially responsible investment and importantly your tolerance to investment losses.  For example, a client with a £100,000 pension fund can ill afford to lose £35,000 if there is a shock event that triggers market falls whereas as client with £750,000 in their pension fund could usually ride out a £35,000 fall.

Attitude to Risk

We will usually agree a general attitude along the following lines:

  • No risk:  you want most if not all of your money in guaranteed safe areas such as an annuity or cash/deposit investments
  • Low risk: you want the majority of your money in secure and low risk areas with only a small proportion e.g. 10% exposed to volatile areas such as stock markets.
  • Low to medium risk: you want mainly secure, cash/deposit funds and bonds with no more than say 25% exposed to volatile markets.
  • Medium risk:  you want a balance of say 50% of funds in cash/deposit funds and bonds and 50% in market sensitive, more volatile funds such property, stock markets and emerging markets.
  • Medium to high risk:  you want lower proportion in secure funds e.g. 25% and a great proportion e.g. 75% in market sensitive, more volatile funds such property, stock markets and emerging markets.
  • High risk:  you want the minimum in secure, cash based funds and virtually all in higher risk, market sensitive, more volatile funds such property, stock markets and emerging markets.

This will of course depend upon age, experience, length of time invested and the goals for the particular pension or investment fund.

Tolerance to Loss

This is where we work out with you the maximum volatility or deviation you would be comfortable with or can afford to hold in volatile times waiting for any market recovery. For younger people this may be higher for longer term pension funds but lower for savings towards a house deposit.  For older people this may be very different. 

On many occasions, we break down peoples savings and pensions into short term (1-5 years), medium term (5-10 years) and longer term (10 years+).  Each sector or scheme will then have its own individual attitude towards risk and agreed tolerance to losses.

Once we have agreed you attitude towards risks and your tolerance to losses, we make then make fund and portfolio recommendations.

Problems arise when, for example: client A has a low to medium investment risk and tolerance to loss overall of say +/-10% pa.  There will be periods when some funds and sectors in your portfolio perform better that others.  For example, after the 'covid' stock market crash in March 2020, many clients saw the value of stock market funds fall by c35% but since then have recovered with some sectors moving even higher than they were.

The problem

Many clients look at the fact that some equity sectors have recovered and then grown by 50, 60 and 70% since the market falls and clients want 'more of that please'.  'I want more in stock markets'.

The issue here is that if you are a low risk investor with no more than +/- 10% pa volatility, we will still offer a similar make up of funds to keep you within your tolerances rather than increasing your exposure to equities.

In the last year, the US Dow Jones had fallen 35% and since risen from its low point by nearly 80%.  For a +/- 10% investor, we would never recommend huge exposure to equity markets as you have stated that you do not wish to see volatility of more than 10% pa. 

The only way we would do this is if we explored again your attitude to risk and your tolerance to loss.  If after then end of these discussions, you wish to increase your risk profile and your % tolerance to loss then we will make fund recommendations to reflect that but you should be careful when revisiting your attitude to risk.

+/- 35% in equity markets will be much more volatile and you need to think hard about your tolerances given that markets can fall dramatically in a short period of time.

This is not just as simple as you contacting us and stating I want more in stock market funds.


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