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Our attitude to investment risk is
subjective
Michael Schumacher took
risks when he drove his Ferrari
If you or I
tried to drive like him it would be considerably riskier, as we don’t have
his skill and expertise
So, how can
you assess you attitude to Investment Risk?
All firms
will have their own measures of risk. Some may be based on numbers 1-10,
some 1-8, some will start at “Cautious” and end at “Aggressive” etc, but
there is no one defined scale against which you can compare these - as
we say, it is subjective rather than objective!
Rather than
try to "pigeon hole" you, we will spend quite some time with you
discussing what we mean by each of these statements and telling you
what sort of areas your money will be invested in. This will be in
different proportions depending on your ages, term of investment and
objectives. Many advisers will use what are known as “stochastic”
modelling techniques. This analysis uses an investment model developed
by consulting actuaries. Such modelling techniques are not widely
available for retail investors and are typically used by pension fund
managers and large institutional investors.
The
projections are designed to show possible long-term outcomes from
different investment strategies and are generated using generic products
and asset types. They are based on generic charges, which are broadly
representative of the typical levels in the market for a product of the
type modelled.
Whilst these
can be useful models against which to pick investments, or compare a
current investment strategy against, we would urge a word of caution. We
have see a number of these, all prepared by “experts”, and all of which
produce different results!
You must
remember that the stochastic model is a projection based on various
criteria and should not be seen as a guarantee of future returns, rather
as a guide to investment diversification. The criteria and assumptions
made by one company may differ wildly from that of another, so this is
not an exact science and please don’t let anyone tell you that it is!
Asset Classes
Below we
list the 7 main asset classes. There are sub-classes and divisions (e.g.
Smaller Companies funds, Technology funds, Emerging Markets), but
broadly the ones listed are the main categories which will comprise an
investment portfolio:-
UK Equity
UK Equities
have historically provided high returns over the mid to long-term.
However equities tend to be volatile over shorter periods and the
uncertainty over the future movements of their prices make them a
riskier investment than some other asset classes.
US Equity
These
potentially offer a more diversified portfolio than UK based equities.
Exposure to the world's largest economy can offer the prospect of higher
returns, but also a higher level of risk than UK equities. These funds
are also subject to movements in currency exchange rates and these
factors in combination lead to above average short-term price
fluctuations.
European Equity
Not totally
correlated to UK markets and therefore providing diversification.
Potential exposure to smaller emerging markets can offer the prospect of
enhanced returns but a higher level of risk than UK equities. Affected
by movements in currency exchange rates and therefore subject to
short-term volatility.
Far East Equity
Exposure to
markets that historically have experienced dramatic price movements and
higher growth economies provide potential for higher future returns.
Consequently there is a corresponding higher level of risk and
short-term price volatility. Far Eastern equities also provide
diversification from UK equities.
Fixed Interest
The fixed
interest asset class includes both gilts and corporate bonds. Gilts are
issued by the British Government and are considered one of the safest
forms of investment. Gilts provide a good diversification from equities
but returns are generally more modest. Corporate Bonds are issued by
companies. They are considered riskier than gilts but pay a
correspondingly higher interest rate to investors. Bonds are negatively
correlated with equities and so provide diversification.
Property
Property
funds enjoy relatively low volatility and provide good, reasonably
stable returns over the mid to long-term. They also provide good
diversification from equities. Investments in these funds is based on
commercial, not residential, property, with which it shares little in
common.
Cash
Cash can be
held within investments or simply as deposits in banks and building
societies. Whilst cash presents no capital risk , assets held in cash
over long periods have tended to be eroded by inflation
Attitudes to
Risk
We have
reproduced the risk descriptions used by a respected life insurer and
fund manager as we feel the descriptions to be the most accurate.
For examples
of portfolios corresponding to the risk profiles below, please follow
the links
Please
remember, these are only guides as contradictory answers on our “Risk
Assessment Profiler” will give misleading results. The experience and
knowledge of a qualified investment adviser will help to complete such a
questionnaire
Each profile
does not come with a prescribed asset mix - indeed you could feel that
you are “balanced to moderately adventurous” and a good portfolio
planner will be able to adjust your assets accordingly
1 -
No Investment Risk
You are not willing to accept any risk to your
investment in the short term and wish typically to invest wholly in cash
assets. You understand that the potential for growth is small and that
over the long-term inflation will reduce the buying power of cash
assets. As you typically wish to invest wholly in cash assets an
investment product is unlikely to be suitable for you as investments in
such products will fluctuate in value and, as product charges could
exceed any growth, you could get back less than you invest.
2 -
Low Investment
Risk
You are willing to accept a low level of risk to
your investment in the short term as you want to build in some element
of inflation proofing. You understand that the potential for capital
growth is small and that over the long-term inflation will reduce the
buying power of your portfolio as you typically wish to invest
predominantly in cash assets. An investment product could be suitable
for you providing the underlying assets do not have a high level of
volatility. Typically, you would consider investing in Cash, Gilts and
investment grade Corporate Bonds but not Property or Equities. You could
get back less than you invest
3 -
Cautious
You are looking for an investment where the return
over the long term is expected to be an improvement on that available
from high street deposit accounts. You are willing to take some risk in
order to seek some growth potential. You understand that this will
increase the amount by which your investment will fall and rise in
value. However, under normal circumstances, you would feel uncomfortable
if your investments fell and rose sharply in value. Typically, you would
consider investing in Cash, Gilts, investment grade Corporate Bonds and
an element of commercial Property, but not Equities. You could get back
less than you invest.
4 -
Cautious Growth
You are looking for an investment where the return
over the long term is expected to be an improvement on that available
from high street deposit accounts, especially where you may be looking
to preserve the value of your capital but also take a level of income,
for example. You are willing to take some risk in order to seek some
growth potential. You understand that this will increase the amount by
which your investment will fall and rise in value. However, under normal
circumstances, you would feel uncomfortable if your investments fell and
rose sharply in value. Typically, you would consider investing in Cash,
Gilts, investment and non investment grade Corporate Bonds, commercial
Property and a small percentage of blue chip UK Equities. You could get
back less than you invest.
5 -
Conservative Growth
You are looking for a balance of risk and reward,
with the aim that in the long term, higher returns may result than those
available from more cautious investments. You are willing to accept that
the value of your investment will fall and rise in value. Typically, you
would consider investing in a wide variety of assets, such as Equities,
Cash, investment grade Corporate Bonds and commercial Property. Risk
will usually be reduced by spreading investment across a variety of
sectors and markets and/or limiting exposure to overseas markets. You
could get back less than you invest. There will also be a small exposure
to currency risk via investment in overseas markets although your
portfolio will be primarily UK biased.
6 –
Balanced
You are looking for a balance of risk and reward,
with the aim that in the long term, higher returns may result than those
available from more cautious investments. You are willing to accept that
the value of your investment will fall and rise in value. Typically, you
would consider investing in a wide variety of assets, such as Equities,
Cash, Fixed Interest and Property. Risk will usually be reduced by
spreading investment across a variety of sectors and markets and/or
limiting exposure to overseas markets. You could get back less than you
invest. Exposure to smaller capitalisation stocks and overseas markets
will increase and fixed interest stocks will be reduced.
There will also be an element exposure to currency
risk via investment in overseas markets as this sector plays a larger
part in the overall make-up of your investment.
7 –
Adventurous
You are looking for a higher level of reward and
consequently are prepared to accept higher levels of short term
volatility and fluctuations in the value of your investments. You are
willing to accept that the value of your investment will fall and rise
in value. Typically, you would consider investing in a wide variety of
assets, such as Equities, Cash, Fixed Interest and Property. Risk will
usually be reduced by spreading investment across a variety of sectors
and markets and/or limiting exposure to overseas markets. You could get
back less than you invest. Exposure to smaller capitalisation stock,
overseas markets and Emerging Markets will increase and fixed interest
stocks will be reduced. There will also be some exposure to currency
risk via investment in overseas markets.
8 -
Speculative
You are willing to accept a high level of risk on
your investment, in order to seek higher growth potential, in the longer
term, than that available on less speculative investments. You are
prepared to accept that this will increase the risk of large
fluctuations in the value of your investment and of losing potentially a
significant proportion of your capital. Typically, you would consider
investing in a narrow range of asset classes, primarily in Equities.
Funds chosen will be aggressive “stock-picking” funds with a high
exposure to Emerging Economies and Specialist sectors. There will also
be high exposure to currency risk via investment in overseas markets.
You could get back less than you invest.
9 -
Very Speculative
You are willing to accept a high level of risk on
your investment, in order to seek higher growth potential, in the longer
term, than that available on less speculative investments. You are
prepared to accept that this will increase the risk of large
fluctuations in the value of your investment and of losing potentially a
significant proportion of your capital. Typically, you would consider
investing in a narrow range of asset classes, primarily in Equities.
Funds chosen will be aggressive “stock-picking” funds with a high
exposure to Emerging Economies and Specialist sectors. In addition, you
are prepared to take a very speculative approach in order to mitigate
tax liabilities through the use of specialist investments such as
Venture Capital Trusts and Enterprise Initiative Schemes. There will
also be considerable exposure to currency risk via investment in
overseas markets. You could get back less than you invest.
10 –
Ultra Speculative
You are happy to invest money into a portfolio where
a large proportion of your investment could be lost in the search for
very high gains. Such portfolios may contain specialist investment
vehicles such as Venture Capital Trusts and Enterprise Initiative
Schemes and invest heavily in Smaller Companies, Emerging Markets and
Specialist Healthcare and Technology stocks. There will be no
diversification across asset classes to provide a level of security in
falling markets. Typically you will have significant experience in
managing a portfolio of not only collective investments but also
individual equities. You are prepared to accept that this will increase
the risk of large fluctuations in the value of your investment and of
losing potentially a significant proportion of your capital. There will
also be considerable exposure to currency risk via investment in
overseas markets. You could get back less than you invest.
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