Understand Risk and Tolerance to Losses

We take great care to make sure investors understand risk definitions and more importantly their tolerance to losses.  We have said many times that our telephones do not ring when people are making money but do ring when investors are worried about markets or indeed have seen fund values fall.

We have five Core definitions of risk for Pensions, Investments and Savings:

No Risk - You are not prepared to see any reduction whatsoever in the value of your investments.  You are only prepared to put your money into investments such as cash or short-term fixed interest securities where the return of capital is guaranteed.  You understand and accept that the future purchasing power of your capital is likely to be lower over the long term than if you hold investments based on shares and property.  You also accept that the income from cash deposits can move up and down, sometimes quite suddenly and that there will possibly be a loss of real value due to inflation erosion.

Low Risk - You are a cautious investor and would want a high proportion of your funds to be in cash based or other guaranteed investments.  However, you are prepared for some of your investments to be in funds where there may be a limited degree of fluctuation in values in return for prospects of modest long-term growth.

Medium Risk - You are a more typical investor who wants some savings and investment in cash, mainly for possible short-term needs.  For the rest, you are prepared to see your investments fluctuate in return for a higher level of prospective growth in both income and capital.  However, you would like to see a reasonable proportion of your investments in largely asset-based investments such as with profit or managed funds.  You may be prepared to put a very small part of your investments into higher risk funds where there is a small risk of loss.

Medium/High Risk - You want only the minimum level of cash deposits to cover short term needs.  For the balance you are prepared to invest in asset-based investments with very little in mixed funds such as with profit policies and managed funds.  Your income requirements are relatively low, and you can afford to take a long-term view of well over ten years.  You like the idea of investing a significant amount of capital outside the UK and are prepared to invest 10% to 20% of your financial assets in higher risk funds.

High Risk - You only want the minimum level of cash deposits to cover short term needs.  For the balance you are prepared to invest in asset-based investment with little or no managed fund or with profit fund investment.  You are comfortable with investments in high-risk funds, individual shares and even unlisted investments.

Overall Risk - I would like to have a range of risk profiles to make up my financial portfolio.  Overall, the range should achieve an averaged risk level as marked above.  This might be a mix between low to medium risk or medium to medium/high risk.

Once you have established your general risk area of mostly cash based investments, mainly asset backed investments or a mixture of the two, it is also best to understand average market deviations in any one year and what your tolerance to losses are in the short term:

Tolerance To Losses Guidance:

See Short Medium and Long Term Financial Needs:  Short Medium Long

By having an understanding of your general risk profile, your attitude to risk and importantly, your tolerance to losses, we can then better understand how to build your pension and investment portfolio to meet your short-term, medium-term and long-term objectives and needs.

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