Investing and risk go hand in hand, but understanding the relationship between risk and return is an important step in developing a strategy that you are comfortable with and suits your goals.

Whilst all investments have some level of risk and no guarantees, there are solutions that tend to be set within certain risk levels so that you can tailor your approach to your own preferences and influencing factors.

Financial Circumstances

Understanding and being realistic in your financial situation, how much you have available to invest and what your financial goals are, is a key initial step to assessing the level of risk that is right for you.

It is important to be as open and honest as you can with your financial adviser to help them gain a true understanding of where you are now in order for them to recommend solutions that are going to be the most suitable for you.

Attitude to Risk

Your adviser will also wish to understand how comfortable you are in taking risks. A key part of our advice process is to complete a Risk Tolerance Questionnaire (RTQ) to help gauge your attitude towards risk and align any recommendations with these preferences.

Investment Timeline

You should view any investment in funds as a medium to longer-term time frame – usually five years or more – because the longer you invest, the less vulnerable your portfolio is to short-term dips in performance.

For example, perhaps you have a shorter-term goal in mind that you would like to save up for, such as a house deposit or a very near retirement. As you will soon rely on the cash, you are likely to be less willing to risk a fall in value and may prefer a more cautious approach.

On the other hand, you may have a goal that is much further in the future. Therefore, you could, perhaps, benefit from more time in the market with a more adventurous approach that has a greater exposure to risk, but also has greater potential for recovery and growth.

Diversification

One way to balance risk and reward is to diversify your portfolio across various asset types to limit exposure to any one type of asset and help reduce volatility over time.

There are two main benefits of a diverse portfolio; minimising risk and maximising opportunity. In short, whether different assets in your portfolio gain or lose value at the same time, diversification helps to minimise this risk by reducing the correlation between your assets – so if one of your assets has performed poorly, it is possible that your other assets could balance this with good performance.

However, some people choose not to diversify their portfolio, instead concentrating on a narrow area – which should be noted as a more high-risk approach.

Seeking Advice

Whilst the thought of investing can feel a little daunting and complex at first, the role of a Financial Adviser is to guide you through the process and help you understand your investments in order to make informed decisions.

Our experienced advisers also believe in creating long-standing relationships with our clients to truly understand you as a person as well as your goals. We also know that these can change throughout your life and in working with you side by side, we can ensure your investment strategy continues to align with your current preferences and visions for the future. 

If you think your preferences may have changed or would like to review your portfolio’s exposure to risk, please do not hesitate to get in touch with a MacDonald Partnership Independent Financial Adviser on 01463 242 242. 

Author: Ross MacDonald

Published: 15th October 2024