Were you a tree-climbing daredevil as a kid, or a more retiring bookish type? Have you since calmed down, or come out of your shell a bit? Would you consider yourself an extrovert or an introvert? These kinds of questions are often posed in the realm of pop psychology and the pages of lifestyle magazines – where outsized importance can sometimes be placed on the impact our childhood behaviours have on the choices that we make as adults.
But while our childhood behaviours undoubtedly help shape our development, how we approach certain risks as adults will also be informed by our peers and partners, as well as by our current financial circumstances and future prospects. The reality is that risk-taking as a child is very different to how an adult with responsibilities and commitments might approach life events – particularly when it comes to financial risk.
So when you’re thinking about money and investments, it’s important to know where you stand on the spectrum of risk-taking as this can determine what strategy is right for you.
Companies offering investment products and services will often ask you to fill out a special risk profile questionnaire, and the questions are typically a lot more grounded in your financial circumstances than all those addictive pop psychology quizzes in magazines. Alternatively, you can work out your risk appetite with an adviser in person or over the phone.
HSBC, for instance, will ask you about the amount of money you typically put aside to meet unforeseen events, and what percentage of your assets are currently held in investments where the value can fluctuate. It uses a scale of one to five to identify the customer’s risk tolerance or attitude to risk (one being lower risk; five being higher risk). It can then match that risk score with an appropriate investment fund. Indeed, the names of some of HSBC’s investment funds reflect attitudes to risk – for example, Adventurous, Dynamic, Balanced, Conservative or Cautious.
Because different kinds of investments have different risk profiles, it is important that you’re aware of your personality – regardless of whether it has been more or less set in stone from childhood or has altered in light of your adult circumstances and commitments – it’s about finding the best match.
James Thurlow-Craig, managing director of Create Designs, a web design and online marketing company, has invested in shares, as well as in his own business. He says he is fairly cautious and makes investment decisions with that in mind. “I try to be as safe with it as possible and to mitigate the risk where I possibly can,” he says. But he also notes that he tries to balance out his tendency to be cautious with an awareness that in some circumstances it could benefit him to take on more risk. “I have to rationalise my thought process.”
Before figuring out whether you’re Adventurous or Cautious or one of the other categories of attitude to risk, the first thing to consider is your reason for investing. For example, you could be investing for your children, or to buy a house or to be able to retire. This will determine when you will likely need to access your money and therefore your timeframe. If you’re investing for your retirement in 40 years’ time, you could take more of a risk than if you are investing to cover your child’s university fees.
As a general rule, the longer your timeframe, the more risk you can potentially take on. This is because longer-term investments tend to withstand short-term fluctuations in the markets, whereas a short- to medium-term strategy is more exposed to market volatility. In the context of investment, risk essentially refers to your appetite for market ups and downs, and varies according to one’s personal goals and time horizon to achieve them “In general, over the long term, the level of returns achieved [on investments] is linked very closely with the level of risk a customer is prepared to take,” explains James Hewitson, Head of Wealth and Advice at HSBC. “We offer options for all levels of risk – from customers who want to keep their money in cash in savings accounts or want to invest in funds that provide some protection from the risk of falling markets, through to customers who want to invest in a range of global assets to smooth out the impact of individual geographies and asset types, all the way up to individual shares listed on both the UK and US stock exchanges.”
Multi-asset funds package together a range of different investments and could therefore help you to spread your risk. Each of these different packages is managed to a different level of risk. For instance, HSBC’s Global Strategy Portfolios are a range of five different funds, each of which is geared to a different appetite for risk, but each is managed to remain within their designated risk strategy.
One thing that might leave you better placed to ride out any short-term volatility in the markets – and therefore leave you more able to take on risk – is having some financial headroom. So before you take on any investments, it is important that you protect yourself from any dips or unexpected costs by having a rainy day fund. The amount of savings you can put away will vary from person to person, but it is good practice to keep at least three months’ living costs at hand so that you don’t have to dip into your investments prematurely.
Hephzi Pemberton, founder of Equality Group and an angel investor who has money in public equity investments, says she is prepared to take risks. “I’ve got quite a healthy risk appetite,” she says. “You’ve got to be quite patient. My advice is that everyone should be using their ISA.”
As Pemberton says, patience is important – as is the ability to hold firm and not panic in the face of short-term volatility. The length of time you hold your investment can count for more than trying to speculate on short-term changes in prices.
Again, the key thing is not to be daunted. Hewitson notes that you can start small if it makes you comfortable: “Even putting away a small amount each month soon begins to mount up but the key is to not delay, the sooner you start, the bigger the potential pot you can create for later in life.”
Investments can carry a higher risk than cash savings and you may not always get back what you put in. Most investments should be considered as a medium- to long-term commitment, meaning you should be prepared to hold them for at least five years.
Whatever your situation and no matter your level of confidence, HSBC UK could help you make better-informed investment decisions. From first-timer to experienced investor, wherever you are in your investment journey HSBC could help you take that next step towards achieving your goals.
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