Understanding The Differences In Investment Risks

Investing in financial markets involves varying levels of risk, and everyone has their own risk tolerance. Risk refers to an investor’s ability to tolerate fluctuations in the value of their investments without panicking and/ or making hasty decisions. Understanding the differences in investment risks is essential for making informed investment decisions.

What are the different types of risk tolerance?

Conservative/low risk tolerance

Investors with a conservative risk are typically averse to risk and prioritise the preservation of capital over high returns. They prefer low-risk investments, such as Government bonds and fixed-income securities. Conservative investors are often seeking stability and are willing to accept lower potential returns in exchange for reduced volatility. They are more concerned with avoiding losses than maximising gains.

Moderate/medium risk tolerance

Investors with a moderate risk strike a balance between risk and reward. They are comfortable taking on a moderate level of risk to achieve potentially higher returns. These individuals may invest in a combination of asset classes, including stocks, bonds, and real estate. Moderate investors understand the need for diversification to spread risk while still maintaining growth potential.

Aggressive/high risk tolerance

Investors with an aggressive risk are willing to accept high levels of risk in pursuit of significant returns. They have a long-term investment horizon and understand that volatility is an inherent part of high-growth investments. Aggressive investors primarily invest in stocks, commodities, and other high-risk assets. They are comfortable with short-term losses in the hope of achieving substantial long-term gains.

Recently we’ve seen the risk explained over more risk categories than above, for example risk levels from number 1 to 10 with a risk level 1 being lower risk and a 10 being very high risk, above is an overview, making it relatively easy to understand.

There are some factors that influence an individual’s risk and it’s important to consider these factors when assessing the individual’s investment strategy:

Can investment knowledge and experience impact risk tolerance?

Knowledge and experience in investing can significantly impact risk tolerance. Experienced investors who have experienced the market downturns and understand the dynamics of different asset classes may be more comfortable with higher levels of risk. Equally, novice investors may have a lower risk tolerance until they gain more knowledge and confidence in their investment decisions.

How can Financial Planner’s help?

Financial planners play a crucial role in helping individuals understand investment risks.

Determining an individual’s investment risk usually involves conducting a risk assessment that considers various factors to gauge their risk tolerance, which is determined following an in-depth discussion and/or meeting, this normally covers the client’s financial situation, their lifetime goals, the investment time horizon and considering the client’s experience and knowledge of investing.

Overall, Financial Planners provide valuable expertise, guidance, and personalised strategies to help individuals effectively manage investment risk. They assess risk tolerance, educate clients, design customised planning, recommend suitable products and monitor the portfolios regularly, to ensure the risk remains suitable and in line with their requirements.  In return, clients can agree to a well-informed investment recommendation and understand the complexities of risk and the financial markets with confidence.