What attitude to risk really means

Your attitude to risk describes the level of risk you are willing to take on a particular investment. There are various factors that can affect your attitude to risk. For example, your personal circumstances, investment goals and timescales and your level of knowledge and experience of different types of investment.

We typically describe a person’s attitude to risk in the following ways:

Defensive

Defensive investors tend to regard themselves as cautious people and view risk negatively rather than as a source of opportunity. They typically have little or no experience of investment and do not find investment matters easy to understand. They can take a long time to make investment decisions and tend to be anxious about any investment decisions they have made. They typically look for safer investments rather than seeking higher returns. They are not comfortable about investing in the stock market and typically prefer bank deposits to riskier investments.

Cautious

Cautious investors tend to regard themselves as quite cautious people and are inclined to view risk negatively rather than as a source of opportunity. They typically have limited experience of investment and do not find investment matters particularly easy to understand. They can take a fairly long time to make investment decisions and can be somewhat anxious about investment decisions they have made. They are inclined to look for safer investments rather than seeking higher returns. They are not particularly comfortable about investing in the stock market and tend to prefer bank deposits to riskier investments. They may be willing to take some risk, once the relationship between risk and higher returns has been explained to them.

Balanced

Balanced investors do not particularly regard themselves as cautious people and have no strong positive or negative associations with the notion of taking risk. They will typically have some experience of investment and a degree of understanding of investment matters. They will usually make investment decisions reasonably quickly and don’t tend to be particularly anxious about investment decisions they have made. They can be inclined to look for safer investments rather than higher returns, but understand that investment risk may be required to meet their investment goals. While they will take investment risk, they are still not particularly comfortable with investing in the stock market and get more comfort from bank deposits than riskier investments.

Moderately Adventurous

Moderately Adventurous investors do not typically regard themselves as cautious people and are inclined to view risk as a source of opportunity rather than as a threat. They generally have significant experience of investment and find investment matters fairly easy to understand. They tend to make investment decisions relatively quickly and are not usually particularly anxious about the investment decisions they have made. They typically look for higher returns rather than safer investments. They are reasonably comfortable about investing in the stock market and typically prefer riskier, but higher returning, investments to keeping money in bank deposits.

Adventurous

Adventurous investors do not typically regard themselves as cautious people and usually view risk as a source of opportunity rather than as a threat. They generally have substantial experience of investment and find investment matters easy to understand. They tend to make investment decisions quite quickly and are not generally anxious about the investment decisions they have made. They typically look for higher returns rather than safer investments. They are comfortable investing in the stock market and prefer riskier, but higher returning, investments to keeping money in bank deposits.

Capacity for Loss

Capacity for loss is an objective measure which looks at whether you have enough income and assets to maintain a comfortable standard of living. It’s about whether you can afford to take risk; and what you can afford to lose if an investment performs poorly.

Measuring capacity for loss is much more fact based than attitude to investment risk, as risk is an emotional driver. If any loss of capital would have a detrimental effect on your standard of living, this should be taken into account when considering if you should invest in risk based investments e.g. shares.

Some of the factors affecting your capacity for loss could be:

  • Known or likely future spending
  • The level of emergency funds you hold
  • Your time horizon for investment
  • Other assets you could call on during a time of crisis
  • The stability of your income and its ability to meet your spending needs

If you have a high capacity for loss you may be able to sustain/accept greater capital losses and be willing to tolerate a higher level of risk to generate potentially higher returns.

However, if you don't have the capacity to sustain a potential loss of an investment then you may have reduced or no capacity to invest. When we meet you, we’ll find out what your attitude to risk is by asking you a series of specifically designed questions. This means you’ll always feel completely comfortable with the level of risk you’re taking, and where your investments are heading.


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