You may or may not be surprised to learn that we very often encounter people who whilst describing themselves as “quite cautious” are taking a very large amount of risk with their money.
Why is that? Well, there are a number of reasons in our experience.
A common reason is that the individual has used a do-it-yourself approach to investing their money.
Over the years they may have been seduced by flavour of the month fund offerings.
You know the kind of thing; for example, technology funds in the late 1980’s which disappointed when that particular bubble burst!
The most extreme example I came across was a lady who described herself as cautious but on analysis of her ISA portfolio we discovered she was 98% invested in international equities – extreme but not unusual.
Or perhaps the individual has been buying funds in a fairly random way and not really done much in the way of joined up thinking.
Equally they may well have bought the fund that their work colleagues or friends had bought without really thinking much about how it applied to them.
Frequently we find that there is little correlation between the degree of risk that the fund brings to a person’s portfolio and their identified financial planning goals. We think this is quite dangerous.
A colleague of mine was telling the story this morning of a client who had received advice to invest a substantial amount of money (over £750,000) in a portfolio of shares and yet when properly analysed it really only required him to invest £250,000 to achieve his retirement goals.
In other words he was being invited to take risk with £500,000 that could actually remain in cash.
Which brings me onto another reason why people sometimes take too much risk with their investments. At the moment interest rates payable on cash investments are perceived as being too low to be attractive.
However, to achieve greater returns than a few percentage points of interest requires investment that might put both the capital at risk and also future investment returns at risk as well. It does not follow automatically that low rates of interest should force a person to invest in a more risky fashion.
Certainly we hold the view that investments should only be carried out if there are clear goals and objectives established in a known time frame.
Having a systematic approach to delivering investment advice means that most (but not all) of the time we can help our clients to take less risk with their investment monies.
So this week’s question to ask yourself is – are you taking too much risk with your investments?
Photo credit: Flickr/Bilal Kamoon
