When we talk to clients, one matter that is always discussed is “attitude to risk”, in terms of investment. The regulatory bodies dictate that we ask a series of scenario-based questions about the subject in order to determine a person’s attitude to risk. The levels of risk are usually categorised with labels that range from “cautious” to “adventurous” and reflect the flexibility that a person has to make or lose money.
Many people think that attitude to risk is about personality. The truth is that it is usually about circumstance. And one important thing to remember is that circumstances can and do change. So, the need to have regular reviews of your circumstances is paramount so that you can alter your risk profile and therefore your investment portfolio – savings, pensions and other retirement vehicles – accordingly.
Your views on the investment time frame appropriate to your circumstance will impact upon your ability to assume risk and the types of investments that you should consider. Therefore we will determine the level of importance which any of your pensions or investments will hold in achieving your financial goals. We will consider your financial capacity to cater for any fall in the value of your assets and the time frame over which you are seeking to hold the investments.
Take this scenario which came to light earlier this year: We’ve been working with a couple for nearly fifteen years – since they were in their thirties. They have always maintained an “adventurous” risk profile and as such their investments have made bigger losses and also bigger gains. Happily for the couple overall, their gains have greatly outweighed their losses, due in no small part to careful and regular financial planning and the use of a Fund Manager to monitor investments.
The couple had always aimed to retire in their mid to late fifties and with that time approaching we met to discuss their retirement plans. I ran the numbers, factoring in their assets, investments, future liabilities, aspirations for lifestyle, inflation and other factors. It was immediately clear that they no longer need to have an adventurous risk profile. They already almost had what they needed and just an inflationary growth of their investments would see them in for a safe landing to retirement.
So, why take unnecessary risks when they didn’t have to? We were able to quickly de-risk their investments giving them lower but safer growth. The couple were delighted, not only because they felt they were “nearly there” but because there was more clarity and certainty to their retirement now that the risk element had been greatly reduced.
The benefits of having a regular financial review are well-illustrated here. Personal circumstances change, investments fluctuate, laws change, new products are introduced and economic conditions and outlooks continuously vary. It is no surprise that people with a good attitude to taking regular financial advice often have enjoyed more financially-robust retirements.