A recent study found that UK investors may be too conservative when assessing the risks of investing. The paper looked at both the consumers’ understanding of risk and the way advisers approach risk assessment. It concluded that UK investors may be jeopardising their chances of reaching their financial planning goals by not fully understanding the risks they may need to take.
This led me to think about the way we assess risk at Callisto. We complete a risk tolerance questionnaire (RTQ), but we also separately test for the client’s ability, willingness and need to take risk.
The investors ability to take risk covers their experience as an investor, their time horizon and so on. Their willingness is their capacity to stomach market turbulence. However, whilst the first two elements are important, it is the client’s need to take which can be most illuminating when discussing risk, because their need to take risk judges their acceptance to trade uncertainty of returns in order to reach their long-term financial planning goals. Whilst some clients need to be encouraged to embrace risk, others need to realise that they have enough assets that they will be unlikely to ever run out of money, and they need to reduce risk to a sensible level, as they have already ‘won the game’ and they do not need to continue playing.
The paper also points out the general lack of understanding of the risks involved in investing from clients. At Callisto we invest the time to find out what the client’s financial goals are, put a sensible written financial plan in place, and the grasp the clients true risk profile to ensure that they have the best chance of achieving those goals.