24 July 2017

I don't want anything risky

I'm always interested in articles about investment risk, since it is such an important part of getting investment choices right. Risk and return go together (at least that's what the theory says), so the aim is normally to go for investments with the highest return consistent with the level of risk you can cope with.

The "standard" financial adviser approach to assessing risk with clients continues to evolve, but I have never been satisfied with the simple 1 to 10 scale which many use. That's partly because there is a lot more to risk than volatility - which is what that scale refers to.

"Capacity for loss" is now something I consider with clients as well - if a particular sum of money is the only money you have to retire on, even though you might consider yourself a high risk investor you shouldn't be investing in anything high risk. That's because you don't have much capacity for losing it!

And it does seem that investing gives you a higher number of "very low" probability outcomes than you would expect - think of 2008 when we saw a number of "once in 500 years" events (or whatever it was). On the other hand there is lower number of "low" probability outcomes than you'd expect. To put it another way investment returns stay closer to what you might expect for much of the time, but when they go awry, they really go awry!

All of which tells me that risk profiling is very much an individual thing, and it depends on someone's circumstances, future plans, other assets, and general outlook on life.

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