Striking the right balance between Risk & Reward

Markets have been up and down over the last few weeks. The Omicron variant has proved to be very contagious but has not caused the same level of serious illness as the previous Delta variant.
The surge of cases worldwide did cause some concern initially which seems to be easing now. However, you will always have events happening on any given day that may impact the financial markets.
There will always be an element of risk in most investments and while diversification is always important, you also need to be mindful of how much risk you are prepared to accept on your money. If your priority is to minimise loss or better still avoid it altogether, you may want a portfolio that holds less in equities and more in cash and low risk fixed Income bonds.

Know your risk appetite:
Any good financial adviser will assist you in completing a Risk Profile Questionnaire. This type of document will help you determine your appetite for risk and give an indication of where you sit on the Risk spectrum. Investing involves a variety of different risks, such as, the risk of not keeping up with inflation, the risk of equity market volatility, the risk that an institution will fail, known as default risk.
What is a good balance for you will depend on your personal circumstances, how much you can afford to lose (your capacity for loss), your investment goals, time frame and need for returns. Your personal attitude to risk is made up of these factors and they make up what’s called your ‘risk appetite’. Of these points, your capacity for loss and your investment goals are the most important. Personal attitude to risk is hard to measure and can be changeable; what feels comfortable one day may not the next.

How to assess your risk appetite:
The following steps should be considered when deciding your risk appetite. Know what you can afford to lose. Ask yourself what would happen if you lost some or all of the money you’re putting into investments.
This will depend on your circumstances and how much of your overall money you are investing. Think about people who depend on you financially and any other important financial commitments you need to be sure of meeting. Work out your goals and time frame.
Your saving and investing choices will depend on your goals and timescales. The bigger your goal in relation to the assets or income you wish to invest, the greater the rate of return required to beat inflation and hit your goal. Taking no volatility risk at all may make your goals impossible to achieve. Taking too much may lose you your investment.

Short-term goals:
Any time under five years goals such as changing your car or a house deposit are best saved for in cash. If you have a short-term goal, your appetite for volatility risk would usually be low, and cash products will be the best place to invest. You don’t want to be worrying about the state of the financial markets when you need your money to be readily accessible. However, cash savings run the risk of not keeping up with rising prices (inflation risk) or even negative rates in some cases.

Longer-term goals:
It’s more usual to put your money into investments that have a better chance of giving you inflation-beating returns (such as shares) but which carry the risk of prices going down.
A longer time frame gives your investment more time to recover if it falls in value. If you have a long-term goal, it makes sense to be prepared to take on volatility risk for the opportunity of higher returns. However, as a long-term goal moves closer, the risk balance should change. For example, you may want to start moving into less volatile assets a few years before the goal date to start ‘locking-in’ gains and protect your investment against events like market falls.
At any one time, you may have a mixture of short-term or critical goals for which you want low volatility (such as saving up to move house) and some non-critical or long-term goals for which you have a higher appetite for volatility (for example, saving towards retirement). Understand your personal risk attitude.

A good way to manage risk is to spread your money across a range of different investment types. Risk attitude is subjective and is likely to be influenced by current events or recent experiences.
When stock markets are rising, we tend to feel comfortable with market risk, when they are falling we do not. Most people are not comfortable with the idea of losing money. On the other hand, we may regret it if we’ve been very cautious and our long-term investments don’t produce the returns we need. You can keep risks in line with your risk appetite by spreading your money across a range of different investments.
Its always worth having a conversation with your financial advisor to get a good steer on your own situation.

Conor Harte is a Financial Planner with Wealthwise Financial Planning who are based in Block C, Hartley Business Park , Carrick on Shannon, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland.#CI66141