Common Investor Risk Profiles – Which Are You?

In investment terms, risk is a spectrum. We recognise that some risk needs to be taken to achieve investment growth.

But there are different kinds of risk. A share portfolio might be more at risk of fluctuating and losing money. But cash in the bank is at risk of reducing in value when adjusted for inflation.

It’s impossible to avoid all risks when investing. It’s important to understand how you feel about the different kinds of risk before you start to build your investment strategy.

In this guide, we look at the common risk profiles and where they can fit into your investment plan.

Defensive
A defensive investor would prefer to avoid risk at all costs. They are extremely uncomfortable with market fluctuations and may not be able to afford to lose any money.

At this risk level, most investors would prefer to keep their money in cash. But this is not a risk-free strategy, as the cost of living is increasing all the time, and interest rates are unlikely to keep up.

A defensive investor risks losing money in real terms as their capital is eroded by inflation.

Tips for Defensive Investors

• Shop around for the best interest rates, including term deposits and notice accounts.
• Avoid holding more than £85,000 with any one bank, as this is the amount covered by the Financial Services Compensation Scheme.
• Consider seeking employment with an organisation offering a defined benefit pension.
• Once you have enough cash to cover any emergencies and at least 5 years’ worth of planned spending, you might want to consider making some small, appropriate investments with anything left over.

Cautious
A cautious investor accepts that they need to take some risk to ensure their money keeps pace with inflation. But they are still a little nervous about investing and do not want their capital to wildly swing in value.

A cautious investor risks falling short of their goals as they may not be willing to take enough risk to achieve the returns they require.

Tips for Cautious Investors

• Diversify your investments. Adding in some global or emerging market equity to your portfolio might seem like a risky move, but it can actually help to reduce volatility as you are spreading your risk over a wider range of assets.
• Consider taking more risks with funds you won’t need to access for a long time, such as your pension. This gives the money more time to recover from fluctuations.
• Aim to reduce risk as you approach retirement.

Balanced
Balanced investors fall somewhere in the middle. They understand and are comfortable with the concept of risk and reward. They are content to take a reasonable amount of risk to achieve their goals and aren’t particularly worried about short-term fluctuations. However, they do not want to take excessive risk and see no need to.

Tips for Balanced Investors

• Clarify your goals so that you know which level of risk to aim for. A cashflow plan can help with this.
• Designate investments for different purposes and adapt the risk level accordingly. The longer the timescale, the more risk you can afford to take.
• Hold a wide variety of investments over different asset classes, geographical regions, and business sectors. This allows you to capture the growth in the market, while smoothing out some of the volatility.

Adventurous
Adventurous investors realise that equity-based investments are likely to provide the highest returns over the longer term. Maximising returns is important, and market volatility is seen as a short-term bump rather than a real loss.

Adventurous investors can risk losing money on their investments, particularly if they don’t follow a sound investment strategy.

Tips for Adventurous Investors

• Don’t try to time the market, as this is likely to reduce your returns over time.
• Avoid concentrating your assets in one area, regardless of the growth potential.
• Do not be tempted to take money out early during a downturn. Always make sure you have enough cash and a plan for any withdrawals.

Speculative
Speculative investors seek high growth at all costs and realise that some of their investments could result in heavy losses. They usually have other assets, which means that they are not reliant on the investment to fund their lifestyle. Business owners often fall into this category, as they are resourceful and used to taking risks.

Speculative investors need to be prepared to lose all of their money when it comes to certain investments.

Tips for Speculative Investors

• Only invest the amount you can afford to lose in high-risk investments. A more moderate approach is likely appropriate for most of your investments.
• Do not fall for scams, and avoid unregulated investments. If it sounds too good to be true, it probably is.
• If you wish to buy risky investments, seek advice on tax-beneficial options such as Venture Capital Trusts or Enterprise Investment Schemes.

Remember, your risk profile is only one component of your investment strategy. You will also need to take into account:

• The returns you need to achieve
• The amount you can afford to lose if the market drops
• How long you can remain invested for
• Your other investments, income and expenditure
• How well you understand investments

A financial adviser can help you devise an investment plan taking into account not only your risk profile, but also your situation, goals, and objectives.

Please don’t hesitate to contact a member of the team to find out more about your investment options.