Our Attitude to Investment Risk is
Subjective
Formula 1
drivers take
risks when they drive in a Grand Prix
If you or I
tried to drive like them it would be considerably riskier, as we don’t have
theirs skill and expertise
So, how can
you assess you attitude to Investment Risk?
All firms
will have their own measures of risk. Some may be based on numbers 1-10,
some 1-8, some will start at “Cautious” and end at “Aggressive” etc, but
there is no one defined scale against which you can compare these - as
we say, it is subjective rather than objective!
Rather than
try to "pigeon hole" you, we will spend quite some time with you
discussing what we mean by each of these statements and telling you
what sort of areas your money will be invested in. This will be in
different proportions depending on your ages, term of investment and
objectives. Many advisers will use what are known as “stochastic”
modelling techniques. This analysis uses an investment model developed
by consulting actuaries. Such modelling techniques are not widely
available for retail investors and are typically used by pension fund
managers and large institutional investors.
The
projections are designed to show possible long-term outcomes from
different investment strategies and are generated using generic products
and asset types. They are based on generic charges, which are broadly
representative of the typical levels in the market for a product of the
type modelled.
Whilst these
can be useful models against which to pick investments, or compare a
current investment strategy against, we would urge a word of caution. We
have see a number of these, all prepared by “experts”, and all of which
produce different results!
You must
remember that the stochastic model is a projection based on various
criteria and should not be seen as a guarantee of future returns, rather
as a guide to investment diversification. The criteria and assumptions
made by one company may differ wildly from that of another, so this is
not an exact science and please don’t let anyone tell you that it is!

Asset Classes
90% of a portfolio’s return is derived from the underlying asset
allocation. Long term investment success depends upon holding, reviewing
and realigning, where necessary, a portfolio diversified by asset,
geography and fund.
This is no easy matter and a Cautious investor will require a different
approach to a Speculative one. For different objectives a different risk
profile and therefore investment spread, will be required.
We avoid at all costs trying to follow “flavours of the month” and
instead construct portfolios that will stand the test of time. Our
service proposition with you is to provide advice and financial guidance
over the long term, not sell you the latest fashionable fund or product.
There will be times when certain assets have underperformed and vice
versa; this is the whole point of diversification v speculation. Here
are some of the most common asset classes.
Fixed Interest
When a company or any institution wants to raise money, they can do this
in a variety of ways. One is to borrow the money from other companies
and individuals by issuing debt. Say, for example, ASCO plc supermarket
wants to raise £15M to build new stores, it could do this by issuing a
bond for ten years paying x% interest a year and repaying the capital at
the end of the term. The creditworthiness of ASCO plc would be assessed
by independent credit rating organisations and rated accordingly – AAA,
AA, BB etc. The lower the credit rating the higher the interest rate, or
“coupon”, as the company has to reward the investor for the increased
risk they are taking.
The fixed interest asset class includes both Gilts and Corporate Bonds.
Gilts are issued by the British Government and are considered one of the
safest forms of investment. Gilts provide a good diversification from
equities but returns are generally more modest. Corporate Bonds are
issued by companies. They are considered riskier than gilts but pay a
correspondingly higher interest rate to investors. Bonds tend to be
negatively correlated with equities and so provide diversification.
A collective investment scheme manager, such as a Unit Trust, will blend
many companies and different durations of bonds and gilts to further
lower risk.
Equities
When a company goes public, i.e. it becomes a plc, its shares are open
to all to buy. Shares are also known as equities. The value of the share
will be reflected in the company’s prospects for growth or earnings, or
a combination of the two. Equities are therefore more volatile than
Fixed Interest assets.
Again, a collective investment scheme manager, such as a Unit Trust,
will invest in many companies and different sectors (e.g. banks,
manufacturers, retailers etc) to further lower risk. Some funds look for
income, some for growth. Some are sector specific and some are
geographically specific too.
UK Equity
UK Equities have historically provided good returns over the mid to
long-term. However equities tend to be volatile over shorter periods and
the uncertainty over the future movements of their prices make them a
riskier investment than some other asset classes.
US Equity
These potentially offer a more
diversified portfolio than UK based equities. Exposure to the world’s
largest economy can offer the prospect of higher returns, but also a
higher level of risk than UK equities.
European Equity
Not totally correlated to UK markets and therefore providing
diversification. Many European companies pay higher dividends than UK
counterparts, plus we have the exciting addition on developing ex
Eastern Bloc countries growing their economies.
Far East Equity
Exposure to markets that historically have experienced dramatic price
movements and higher growth economies provide potential for higher
future returns. Consequently there is a corresponding higher level of
risk and short-term price volatility. Far Eastern equities also provide
diversification from UK equities.
Emerging Markets
Not totally correlated to UK markets and therefore providing
diversification. Potential exposure to smaller emerging markets can
offer the prospect of enhanced returns but a higher level of risk than
UK equities. There is a corresponding higher level of risk and
short-term price volatility. This classification includes countries such
as Brazil, Russia, India and China although the latter two are expected
to be amongst the largest economies within the next 10 to 20 years
Commercial Property
Property funds used to enjoy relatively low volatility and provide good,
reasonably stable returns over the mid to long-term. They also provide
good diversification from equities. The Credit Crunch wiped out many of
the stellar gains made in this class since 2005, but a small percentage
in this class is useful
Alternative Investments/Derivatives
Many collective investment schemes have new powers to invest using
sophisticated financial instruments to lessen volatility in portfolios.
Not all funds use these techniques and this is neither a positive or a
negative – it depends upon the fund manager’s remit and objectives.
Finally, bear in mind that overseas investments are also subject to
movements in currency exchange rates and these factors in combination
lead to above average short-term price fluctuations.

Attitudes to
Risk
We have
reproduced the risk descriptions used by a respected life insurer and
fund manager as we feel the descriptions to be the most accurate.
For examples
of portfolios corresponding to the risk profiles below, please follow
the links
Please
remember, these are only guides as contradictory answers on our “Risk
Assessment Profiler” will give misleading results. The experience and
knowledge of a qualified investment adviser will help to complete such a
questionnaire
Each profile
does not come with a prescribed asset mix - indeed you could feel that
you are “balanced to moderately adventurous” and a good portfolio
planner will be able to adjust your assets accordingly
1 -
No Investment Risk
You are not willing to accept any risk to your
investment in the short term and wish typically to invest wholly in cash
assets. You understand that the potential for growth is small and that
over the long-term inflation will reduce the buying power of cash
assets. As you typically wish to invest wholly in cash assets an
investment product is unlikely to be suitable for you as investments in
such products will fluctuate in value and, as product charges could
exceed any growth, you could get back less than you invest.

2 -
Low Investment
Risk

You are willing to accept a low level of risk to
your investment in the short term as you want to build in some element
of inflation proofing. You understand that the potential for capital
growth is small and that over the long-term inflation will reduce the
buying power of your portfolio as you typically wish to invest
predominantly in cash assets. An investment product could be suitable
for you providing the underlying assets do not have a high level of
volatility. Typically, you would consider investing in Cash, Gilts and
investment grade Corporate Bonds but not Property or Equities. You could
get back less than you invest

3 -
Cautious

You are looking for an investment where the return
over the long term is expected to be an improvement on that available
from high street deposit accounts. You are willing to take some risk in
order to seek some growth potential. You understand that this will
increase the amount by which your investment will fall and rise in
value. However, under normal circumstances, you would feel uncomfortable
if your investments fell and rose sharply in value. Typically, you would
consider investing in Cash, Gilts, investment grade Corporate Bonds and
an element of commercial Property, but not Equities. You could get back
less than you invest.

4 -
Cautious Growth

You are looking for an investment where the return
over the long term is expected to be an improvement on that available
from high street deposit accounts, especially where you may be looking
to preserve the value of your capital but also take a level of income,
for example. You are willing to take some risk in order to seek some
growth potential. You understand that this will increase the amount by
which your investment will fall and rise in value. However, under normal
circumstances, you would feel uncomfortable if your investments fell and
rose sharply in value. Typically, you would consider investing in Cash,
Gilts, investment and non investment grade Corporate Bonds, commercial
Property and a small percentage of blue chip UK Equities. You could get
back less than you invest.

5 -
Conservative Growth

You are looking for a balance of risk and reward,
with the aim that in the long term, higher returns may result than those
available from more cautious investments. You are willing to accept that
the value of your investment will fall and rise in value. Typically, you
would consider investing in a wide variety of assets, such as Equities,
Cash, investment grade Corporate Bonds and commercial Property. Risk
will usually be reduced by spreading investment across a variety of
sectors and markets and/or limiting exposure to overseas markets. You
could get back less than you invest. There will also be a small exposure
to currency risk via investment in overseas markets although your
portfolio will be primarily UK biased.

6 –
Balanced

You are looking for a balance of risk and reward,
with the aim that in the long term, higher returns may result than those
available from more cautious investments. You are willing to accept that
the value of your investment will fall and rise in value. Typically, you
would consider investing in a wide variety of assets, such as Equities,
Cash, Fixed Interest and Property. Risk will usually be reduced by
spreading investment across a variety of sectors and markets and/or
limiting exposure to overseas markets. You could get back less than you
invest. Exposure to smaller capitalisation stocks and overseas markets
will increase and fixed interest stocks will be reduced.
There will also be an element exposure to currency
risk via investment in overseas markets as this sector plays a larger
part in the overall make-up of your investment.

7 –
Adventurous

You are looking for a higher level of reward and
consequently are prepared to accept higher levels of short term
volatility and fluctuations in the value of your investments. You are
willing to accept that the value of your investment will fall and rise
in value. Typically, you would consider investing in a wide variety of
assets, such as Equities, Cash, Fixed Interest and Property. Risk will
usually be reduced by spreading investment across a variety of sectors
and markets and/or limiting exposure to overseas markets. You could get
back less than you invest. Exposure to smaller capitalisation stock,
overseas markets and Emerging Markets will increase and fixed interest
stocks will be reduced. There will also be some exposure to currency
risk via investment in overseas markets.

8 -
Speculative

You are willing to accept a high level of risk on
your investment, in order to seek higher growth potential, in the longer
term, than that available on less speculative investments. You are
prepared to accept that this will increase the risk of large
fluctuations in the value of your investment and of losing potentially a
significant proportion of your capital. Typically, you would consider
investing in a narrow range of asset classes, primarily in Equities.
Funds chosen will be aggressive “stock-picking” funds with a high
exposure to Emerging Economies and Specialist sectors. There will also
be high exposure to currency risk via investment in overseas markets.
You could get back less than you invest.

9 -
Very Speculative

You are willing to accept a high level of risk on
your investment, in order to seek higher growth potential, in the longer
term, than that available on less speculative investments. You are
prepared to accept that this will increase the risk of large
fluctuations in the value of your investment and of losing potentially a
significant proportion of your capital. Typically, you would consider
investing in a narrow range of asset classes, primarily in Equities.
Funds chosen will be aggressive “stock-picking” funds with a high
exposure to Emerging Economies and Specialist sectors. In addition, you
are prepared to take a very speculative approach in order to mitigate
tax liabilities through the use of specialist investments such as
Venture Capital Trusts and Enterprise Initiative Schemes. There will
also be considerable exposure to currency risk via investment in
overseas markets. You could get back less than you invest.

10 –
Ultra Speculative

You are happy to invest money into a portfolio where
a large proportion of your investment could be lost in the search for
very high gains. Such portfolios may contain specialist investment
vehicles such as Venture Capital Trusts and Enterprise Initiative
Schemes and invest heavily in Smaller Companies, Emerging Markets and
Specialist Healthcare and Technology stocks. There will be no
diversification across asset classes to provide a level of security in
falling markets. Typically you will have significant experience in
managing a portfolio of not only collective investments but also
individual equities. You are prepared to accept that this will increase
the risk of large fluctuations in the value of your investment and of
losing potentially a significant proportion of your capital. There will
also be considerable exposure to currency risk via investment in
overseas markets. You could get back less than you invest.

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