If you are thinking of becoming an investor, someone that creates their own portfolio rather than depositing their wealth in a bank, then you need to know what your appetite for risk is to avoid stress and disappointment.
By investing directly rather than through a bank you will give up some guarantees, but in return will gain access to better rates of return. Giving up guarantees means living with uncertainty and you need to think carefully if this will suit you.
If you want to get higher returns but seeing your shares go down in value will torment you, then you may be best accepting more moderate returns with less stress. On the other hand, if you can easily see the long term and are able to ignore short term drops in the value of your portfolio then investing directly will be easier for you to manage.
Our risk appetite questionnare helps you understand how comfortable you are with uncertainty so that you can understand what investment strategy would be comfortable for you.
There are a couple of rough and ready, but generally true rules of thumb:
- The greater the potential for return the more likely there is to be uncertainty
- The longer the term of your investments, the more certain you can be
- The wider the spread of investments, the more certain you can be
For exmaple, it is possible to weather extreme fluctuations in the market if you can afford to “stay in”. If you are forced to withdraw your investments when the market is down then you could lose, but if you can wait, then normally it is possible to recover drops in market value without suffering real cash losses. Don’t forget though, that achieving the best returns is always a matter of luck as nobody knows which investments will be the best. By spreading investments your portfolio is likely to touch the best performers, but just as the spread protects from the worst, it also averages you away from the best.
Even with those rules of thumb, investing can feel counter-intuitive, particularly when your income and well-being is dependent on it. The new science studying decision making is strarting to explain the various mechanisms in our brains that make it tricky. But simply put, the problem is that short-term market moves can be very impactful on our day to day stress levels and that can lead to short-term decision making and unnecessary losses. This questionnaire helps you tease out your attitude to risk and will allow us to tailor our investment recommendations to suit you.