What’s your appetite for risk when investing?

If only investing was a one-way bet! How great it would be to put money away and just watch it constantly increase. But of course, life (and investing) is not that simple. The rewards that you get from your investments are inexorably linked to the level of risk that you are willing to take.

That is why we spend so much time seeking to understand both your appetite for risk and your capacity for it. Are you someone who worries about every movement in the markets and lies awake worrying about money? Or are you someone who lives happily through the peaks and troughs of the markets without a second glance, always keeping a long-term perspective?

There are the obvious risks such as good / bad stock selection and asset allocation decisions by fund managers, that impact the value of investments. But there are also other less obvious ones that are considered by investment professionals.

We’ve set out some of them below, but please note - this is not an exhaustive list! There are other risks in play, we’ve just set out some of the main ones that are considered by fund managers as they try to maximise the returns for investors.

Economic Risk

A fairly obvious risk… When economies are booming, investments (particularly in stock markets) tend to follow suit. Likewise, when economies see lower growth or indeed negative growth, investments tend to follow the downward trend. Think back to 2008 when the global economy went into deep recession. Unfortunately, most investments followed this steep downward path.

Geopolitical Risk

Think Brexit… Or Donald Trump being elected! These are politically led events that create uncertainly. However they don’t always play out as expected. The election of the new POTUS was expected to have a negative impact on markets, however in the first year of Mr. Trump’s presidency the S&P 500 index was up over 20%!

Currency Risk

Again, think of Brexit. While assets that investors hold in the UK might be performing ok within the UK, the poor performance of sterling in recent years since Brexit was announced has had a negative impact on the actual returns for investors when converted into Euros. Currencies play an important role in investing.

Market Risk

This is where a whole sector might be impacted by a single event unrelated to many of the companies in the sector. Think of an unexplained airplane crash – this might negatively impact all airlines and indeed airplane manufacturers even though nothing has changed in the vast majority of their individual businesses. A bit like a ripple effect…

 As stated earlier, this is not an exhaustive list of risks – there are many other risks considered by fund managers. For you though, it is important to be clear about your appetite and capacity for risk, and to ensure that your portfolio reflects this. Then you can leave the investment professionals to worry about managing the impacts of all of these different risks.