There Are No Stupid Questions: The Risk Factor

Attivo’s mission is to answer questions about lifestyle financial planning in a clear and straightforward way. In this issue, Stephen Waite talks about the risk factor.

Stephen Waite is a Financial Planner at Attivo and is one of our network of advisers located across the UK. Stephen, a Certified Financial Planner and a member of the Chartered Institute for Securities & Investment, says: “A discussion around ‘risk’ should always be undertaken with your lifestyle financial planner.” The bottom line is you need to take a level of risk depending on what you want to achieve financially. At Attivo, they will assess your personal tolerance for risk alongside your long-term financial goals to build a plan.

 “Everyone’s lives change – and with this, the need or capacity for risk might change.”

Q What does ‘risk’ mean when looking at lifestyle financial planning?

A The word ‘risk’ can make people uneasy because, after all, who wants to take risks with their hard-earned money? Part of my role is to help people to understand why they might need to take a risk. 

It’s relatively simple; risk and return go hand-in-hand; a low-risk investment it is very unlikely to give you a high return – in fact, if someone offers you a low-risk investment and a high return, it’s almost certainly too good to be true. It just doesn’t happen. 

Cash is a low-risk investment and considered ‘safe’. If you have £1k in your bank account and don’t spend any money, the next day you’ll still have £1k in the account. While that money sitting in your bank may feel safe, if you’re looking at the long-term picture for your finances, you might be jeopardising your financial security because inflation will eat away at the value of your cash. A pint of milk 20 years ago would have cost around 35p; now, that pint costs you about a pound: the cash you had sitting in that bank account now has far less buying power. 

If you want your money to keep pace with or beat inflation in the longer term, then you will need to take some investment risk. 

Q How do you decide how much ‘risk’ to take with client investments? 

A I discuss my client’s circumstances with them, and they share what they would like to achieve over the longer term. It is vital to understand what sort of lifestyle our clients want. We then help them shape their finances so they can understand how long it will take them to achieve their goals. As part of the process, we assess a client’s tolerance to risk by asking them to fill in a questionnaire, and we also talk through the level of investment risk they would need to take to achieve their goals and whether they have the capacity to carry that risk. It is the combination of these three elements that determine an individual’s risk profile. 

Someone who would like to retire in 30 years will likely have a different risk profile to someone who will need to access money in the next five years. In all cases it is important to build in some contingency as circumstances can change unexpectedly for individuals.

Q So how does lifestyle financial planning come into this? 

A To understand how to invest your money and how much risk you want to take with it, you need to understand what the long-term aim of it is and what you want to do. And this means it comes down to lifestyle financial planning. 

We will sometimes meet clients who have inherited a significant sum of money and it can be the first time they have taken advice. They might see the inheritance as a means of retiring early but are unsure about investing it and would prefer to keep it in cash. We will discuss the fact that this money will need to generate an income for them to live on if they want to retire early, and by carrying out a cashflow planning exercise, an adviser can illustrate how, if there is only cash to draw on, it will last a finite number of years. 

If you start to build in a little investment risk, we can demonstrate that in all likelihood, the money will last much longer. By taking some investment risk, there is a greater chance of financial security later in life. Everyone’s lives change – and with this, the need or capacity for risk might change, and that’s why it’s essential for your financial planner to talk to you regularly. It means that if it’s been a bad year for investments, no one is shocked (and vice versa). 

Q My portfolio looks as if it’s dipped dramatically over the past few months, making me nervous. Should I talk to my adviser? 

A It might sound counter-intuitive, but this is where generally we advise our clients to do nothing and to hold tight, because the lifestyle financial plan has been built to withstand any downturns such as these.

For example, the pandemic introduced sudden and dramatic change but, as my clients are educated on risk from the start, they knew that this is expected and all part of the journey. They can sleep at night and not worry. We had contingency built in, which meant the client’s long-term plans remained on track. We could stay invested and await recovery. 

We know we will have periods where markets will fall, but investment is a long-term commitment and it’s about sticking with the plan. There can be significant fluctuations in value between the best years and the worst. Still, we shouldn’t let these shorter-term movements unduly influence our decision-making because it is the long-term outcome that matters. 

Jargon Buster: ‘Capacity for Loss’

The impact a fall in the value of your investment would have on your standard of living, and whether this is something you’d be able to live with. 

Prepare for your next phase of life