Risk assessment

WHEN we talk about risk, it’s usually to do with risky behaviour - climbing scaffolding while drunk, driving without a seatbelt on, leaving your front door wide open to thieves.

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When it comes to money, most of us hear the word ‘risk’ and think, ‘No, thank you, I’ve got no interest in risking - and losing - my life savings! But being financially risk averse can be a risk in itself.

Here James Bulman, director and financial planner at Smith & Pinching, explains what financial risk actually entails, how to find the right level of risk for you, and what options there are when it comes to investing...

Investment vs savings accounts

For starters, James says “people get confused by investments and savings accounts”. On the one hand, you have the “asset allocation of a portfolio” and on the other, “savings and deposit-based accounts” You can rack up savings in a tax-free cash ISA, junior ISA or in Premium Bonds, “but you’d more be using these as a wrapper for tax benefits, rather than necessarily calling that a low-risk investment,’ he explains.

The difference is, with an investment “it could be volatile with market conditions’, whereas savings accounts are generally “easy access” or “ways to protect your money against investment falls”.

Investment options

So what investment types are there? The Financial Conduct Authority crudely treats equities and property investments as high risk,’ says James. “They use bonds, Absolute Return Funds and Money Market Funds as cautious.”

That said, things are always changing. “If you were in bonds at the minute, if you see the volatility that is going on in the market, there could be high correlation with equities,’ says James. “So I’m putting clients in money market funds because it’s offering a reasonable level of stability.”