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We all go into investing for one simple reason: to make money. However, taking on risk is the essence of investing; if there were absolutely no risk represented by an investment then why would a return be offered on it?

Understanding your risk profile is a fundamental pillar of investing. The reality is there is no such thing as an entirely safe investment, yet there is of course a whole spectrum on investment risk. Some “safe haven” investments are very close to being a safe store of value and tend to offer a corresponding return. Those who want their money to work harder will move up the risk ladder (to an appropriate degree recommended by their investment adviser) in order to chase higher returns.

Of course, investment risk isn’t about binary choices at all.

The skill of the wealth manager is to invest your money in an appropriate blend of asset classes, markets and financial instruments to build a portfolio which balances risk and expected returns appropriately for your objectives

Essentially, their job is to ensure that – as far as possible – your investments deliver the level of returns you need them to, when you need them to. Considerations like the cost of making an investment, tax issues and your investment preferences, along with questions like whether you have a significant proportion of your assets already tied up in property will also come into play. Understanding your risk profile is crucial to successful wealth management.

How it works

There are several elements to a full risk profile and wealth management organisations vary quite significantly on how they assess prospects and clients (reassessing your risk profile periodically to ensure investment portfolios remain suitable over time is a key duty imposed by the regulator). Extensive use is made today of online risk-profiling questionnaires, which may illustrate scenarios graphically to help the person being assessed visualise potential losses and gains. These questionnaires can be highly sophisticated and some online-only platforms rely solely on their assessments. However, because of the complexities the question of risk can throw up, wealth managers generally tend to use these tests merely as a starting point for validation and further exploration through a face-to-face discussion. The kind of intelligent questioning which draws out a person’s true attitudes and expectations is a skill which relationship managers possess in abundance and our users frequently tell us that these discussions were a highly revealing exercise.

Your risk tolerance and capacity for loss

It is vital that you feel comfortable with the amount of investment risk you are exposed to; ensuring that you have a comfortable investment journey is actually a significant part of what wealth managers are seeking to do when they devise your investment plan. For example, if a lot of volatility (your investments going up and down in value often) would bother you then your adviser would look to deploy sophisticated strategies to smooth these humps in value over.

Many people go into investing thinking that they have a pretty good idea of what their attitude to risk is, only to find that their assumptions are slightly (if not radically) inaccurate once they have had an in-depth discussion with a professional and really thought things through. It is very common for people to significantly over-estimate their risk tolerance at first and then revise it down when they consider what a loss of X% would have on their financial objectives. Conversely, many investors are initially in danger of being excessively risk-averse and need to revise up their notion of the amount of risk they need to take on in order to achieve their long-terms goals (the fact that simple inflation erodes the buying power of money is something all investors need to bear in mind, particularly in a low interest rate environment).

It goes without saying that your attitude to risk is inextricably bound up with your capacity to absorb potential losses and also what you are trying to achieve through your investments. Your discussions with your wealth manager will result in a portfolio designed to deliver the optimum risk-return profile for your profile and needs. Something you also might like to discuss with your adviser is setting different risk parameters for different pots of money – keeping your pension run on quite conservative lines with a smaller, more aggressive investment mandate run alongside, for example. It can useful to think about investment risk as a variable which can be dialled up, or down, for portions of your portfolio both when your strategy is first devised and in response to changes in your requirements.

Your experience as an investor

Your wealth manager will need to get a good understanding of your investment experience and your knowledge of how markets and financial instruments work. All wealth managers tend to serve a very wide range of investors. A client may be completely new to investing or equally they may be a hedge fund manager chasing stellar returns through the use of complex, more risky investment instruments like derivatives. Your chosen institution will therefore carefully assess your experience as an investor to ensure that that they only propose investments that you are comfortable with.

Your objectives and time-horizon

Your financial adviser will put a lot of effort into achieving a deep understanding your investment objectives, looking at your circumstances holistically. You are likely to have a number of goals you wish to achieve and crucially these are likely to be spread over a wide timeframe, from a few years to perhaps several decades ahead.

Whether you are seeking an income from your investments or a certain level of capital growth is a key question and will help determine the proportion of bonds, equities, funds and alternative investments which represent an appropriate split for your assets (the asset allocation for your portfolio). You may, for instance, have reached retirement age and be seeking an investment strategy which will ensure that your pension pot delivers your desired level of returns over a long period so that you can maintain a certain standard of living entirely from this income; equally, you may seeking to allocate a portion of your assets to a more aggressively positioned portfolio in order to seek an attractive return over the short term.

It is generally held that the longer your investment time horizon, the more risk you can take on since you will have more time to recover from any losses. Your time horizon(s) and what you are looking to achieve from your investments will be foundational to the discussions you will have with your adviser and these may well change significantly as your life evolves. This is another reason why long-term relationships based on personal knowledge are crucial in wealth management – and why finding precisely the right provider for your profile and needs is essential.

Your liquidity needs

A final, very important, consideration is your liquidity needs – how much money you need to have readily available. Clearly, you should never invest so heavily that you do not have sufficient money to maintain your lifestyle for quite a long period if you should fall ill and not be able to work, for example. The accepted wisdom is that you should retain three to six months of your current income as an emergency fund, but you do not necessarily have to hold this as cash. Your wealth manager will be able to recommend highly-liquid investments so this reserve money can also be working as hard as possible.

Your initial meetings with your wealth manager should be very helpful in terms of crystallising what you want your investments to deliver, and determining the level of investment risk which is appropriate for you at this point in time and looking ahead. Indeed, many of’s users tell us that the risk profiling part of starting a wealth management relationship was a hugely valuable process which created a great deal of peace of mind. Knowing that your money is working as hard as possible within the risk parameters you have set and putting yourself on a path to achieving your goals can be a great feeling.

Simply try our smart online tool to find the best-placed investment professionals to serve you. Or, if you would like to discuss your situation with our straight-talking team, please do get in touch here.

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