Investing and Risk

Investing is marked by highs and lows. Understanding your risk tolerance is vital to ensuring your investment strategy is suitable for you.

Risk Tolerance

Investing and Risk

Investing is marked by highs and lows. Understanding your risk tolerance is vital to ensuring your investment strategy is suitable for you.

The Investment Rollercoaster

Market downturns are not uncommon in the investment landscape. They are regular events that halt the upward trajectory of the financial markets. These downturns shouldn’t surprise you; rather, they are to be expected in the cyclical nature of markets.

These periods of decline can stem from various factors, including economic shifts, geopolitical events, or sector-specific challenges. However, it’s crucial to grasp that market fluctuations, both upward and downward, are a fundamental aspect of the investment ecosystem.

Furthermore, understanding your risk tolerance and the different types of risk is paramount.

Diversification and Risk

All investments carry some element of risk. The value of the fund can fall as well as rise and you may not get back the full amount originally invested. To enable funds to be able to manage risk, the manager will practice some level of diversification. This works on the premise that holding two different shares is better than two of the same shares. This is because all shares react differently to investment conditions and changes. 

For example, imagine that there are only two companies, one company making t-shirts and one company making woolly jumpers. If the weather forecast is for sunshine, then investors would be wise to buy shares in the t-shirt company as they expect demand for t-shirts to increase and sales to rise, increasing the company share price. However, we know that it is not always sunny and therefore a good manager would buy shares in both companies, so when one share price is static or even falling, the other is able to support and perhaps offset the falls, meaning that the investor doesn’t suffer a loss.

The Fundamental Types of Risk

Market (Systematic) Risk

Market risk, also known as systematic risk, is the inherent volatility of financial markets, influencing the value of investments. In essence, this type of risk is, in almost all cases, not possible to avoid.

Specific (Unsystematic) Risk

This involves risks inherent to a particular asset or sector and thus is easier to avoid. For instance, company-specific risks might include management changes, product recalls, or takeovers. Sector-specific risks could stem from regulatory changes or shifts in consumer preferences affecting specific industries.

Inflation Risk

Inflation risk arises from the erosion of purchasing power due to a rise in the general price level of goods and services. Investments failing to outpace inflation may result in diminished real returns.

Concentration Risk

Concentration risk emerges from an overexposure to a particular asset class, sector, or individual investment. This commonly arises from an Employer’s reward scheme whereby an Employee is given shares as a bonus and thus over time the Employee builds up a large concentration of their assets in one Company’s shares.

Currency Risk

Currency risk pertains to foreign exchange investments. The risk of losing money on foreign exchange investments because of movement in the exchange rates is currency risk. For example, if the US dollar depreciates to the Swiss Franc, the investment in US dollars will be of less value in Swiss Franc. The converse is true should the Swiss Franc depreciate instead.

Equity Risk

Equity risk is all about the investment in shares. The market price of shares is volatile and keeps on increasing or decreasing based on various factors. Thus, equity risk is the drop in the market price of the shares at moments in time where adverse market risks have occurred.

A Service as Unique as Our Clients

Experience over 37 years tells us that everyone really is different. The complexities of uncovering your risk tolerance and risk management strategies can seem intimidating. With the myriad of differing tax rules, investment regulations, and more, it can be extremely challenging to know whether or not your money is working as efficiently as possible for you, and at a level of risk that is acceptable.

This is where we come in.

With our specialist advice service at Patterson Mills, which is tailored to ensuring you have the best possible chance of financial independence, we are well versed in managing risk for our Clients and shaping a risk management strategy that is suitable for them.

There is no one-size-fits-all solution. However, being completely independent, we have ensured that our access to the entire market enables us to offer our Clients a service that is just as distinctive as them and one that can meet any level of risk required.

To find out what you may be missing, get in touch. You have nothing to lose and potentially much to gain.