Investing guides
How to work out your attitude to risk
Your attitude to risk can make a big difference to your profits and reaching your financial goals.
Please remember, investment value can go up or down and you could get back less than you invest. The value of international investments may be affected by currency fluctuations which might reduce their value in sterling.
Choosing the right investments for you means accepting a certain level of risk.
Whether it’s high, medium or low, understanding terms like ‘risk appetite’ or ‘capacity for loss’ is important to building a portfolio that works for you.
Let’s take a closer look at risk, how it’s measured, and how much you’re willing to take on.
What is attitude to risk?
Your attitude to risk, or ‘risk appetite’, is a measure of how much investment risk you are ready to take with your money. Knowing your risk profile can help build a portfolio that suits you, ensuring investments align to a set financial goal that you are happy with.
Everyone’s experience is different and factors such as financial status, financial goals and personality play a big part in shaping what risk you’re willing to take on.
It’s important to understand your attitude to risk
Making a knee-jerk investment without considering risk is itself a risky move. Although you may get higher returns with riskier investments, you also run a higher risk of losing your money.
A big part of understanding your attitude to risk is thinking about how much money you can afford to lose – your ‘capacity for loss’. For instance, should an investment go the wrong way, would it have an impact on your standard of living? If not, are you able to weather a financial storm for the chance to see your money eventually grow?
What kind of investment risk profile are you?
How risk is defined varies across different investment platforms and even independent financial advisors might have their own definitions of risk. You might hear the terms ‘adventurous’, ‘balanced’ and ‘cautious’. Or a risk scale from ‘conservative’ to ‘very aggressive’. For now, let’s simply use a ‘high’, ‘medium’ and low’ approach to risk:
Low risk appetite
Your money: You are happy with lower returns that keep up with inflation.
Your investments: You want easy access to your investments to sell when you need the money.
Your goals: You may be coming up to retirement and can’t afford to lose potential income.
Medium risk appetite
Your money: You want profits to be over and above inflation.
Your investments: You don’t need to access your investment in the short term.
Your goals: You’re happy with some volatility since you won’t need the money anytime soon.
High risk appetite
Your money: You want high profits.
Your investments: You accept higher volatility in your investments.
Your goals: You’re financially stable and have a higher capacity for loss.
Your level of risk appetite can change
Appetites to risk vary from person to person and across age groups. You can expect your own risk profile to change as your investments grow in value and as you approach retirement. Generally, younger investors may take on greater risk while older investors have less time to make up potential losses, therefore reducing risk ahead of retirement.
Your attitude to risk should reflect your goals. Even if you enjoy taking risks, it’s probably wise to reduce risk as your goals get nearer. You don’t want your portfolio to drop in value just as you need access to the money.
Financial advisors will recommend having an annual (if not more regular) review of your attitude to risk. Make sure that your financial situation can continue to withstand higher risk investments and adjust accordingly. Equally important is the need to measure investments against economic and global trends, since the investments themselves can grow riskier depending on what is happening to the wider economy.
Find out what your attitude to risk is
How do you assess your own risk? There are questions you can ask yourself to determine where you sit on the risk scale. From how you might feel if you lose money during a sudden shock to the market, to what return you expect from investments.
Take our short quiz to get a sense of your appetite to risk.
Learn more about investing
Learn how to make the most out of your investments with our useful guides.
