If you have a lump sum to invest, are starting to save regularly, or are setting up a pension, understanding risk is key to success. There are two areas of risk that you need to understand before you make any decisions to invest:
1. Your attitude to risk
2. How funds are risk rated
Once you understand the factors affecting risk and how these are correlated to the reward, you’ll be in a better position to make an informed decision about your investment.
Your own attitude to risk
What surprises people most is that their attitude to investing can vary. The level of risk you are comfortable taking can depend on what you are trying to achieve and how long you are happy to invest. While you may consider yourself risk averse, you may be prepared to take on some risk if you are investing for a longer term. In the same way, if you consider yourself a risk taker but you only have a short-term window, then you may wish to consider lower-risk options.
The very best thing to do is to talk to your financial broker and allow them to help you assess your risk profile. You’ll be categorised into one of 7 different risk profiles and your broker will be able to suggest suitable investment options within your category.
How funds risk rate
When you are risk profiled, you’ll be categorised into one of 7 risk profiles. This is because all funds are also categorised by risk into one of these 7. This 7-risk scale is called the ESMA risk rating system. The European Securities and Markets Authority (ESMA)devised this risk rating system ranging from 1 to 7 to assist investors in assessing their risk preferences. 1 represents the lowest level of risk and 7 the highest level.
Remember your risk rating is unique to your own circumstances, goals and risk appetite. These can vary depending on what your investment is for and can also change over time depending on your financial situation. The risk rating of a fund may also change over time depending on market conditions.
The ESMA risk rating system is a valuable tool as it helps you understand the fund choices available to help you meet your investment goals better. You can more easily create portfolios that deliver the right balance between risk and reward for your own personal circumstances. Remember, however, that investing always carries inherent risk and that’s where our experience can help you in making the most suitable choices. To get started on the road to understanding your risk profile just contact us at Searing Point Wealth Management.
