Assess Your Preferred Risk Level
Age and risk are intimately connected. Generally older people are more cautious about risk and younger investors are better able to withstand risks that may deplete their wealth. But attitude to risk isn’t entirely straightforward. Some UK investors (young, middle-aged and old) are instinctively and fundamentally cautious and risk averse owing to their temperament and personality.
These individuals are low-risk investors by nature, averse to buying too many assets that have the potential to collapse in value.
Other investors of all ages (though probably more often the younger) trade like dervishes and love a dash of risk! These higher-risk (or more adventurous) investors are absolutely willing to take on extra risks in order to have greater potential for returns. They’re enthusiastic about investing in products that may be very volatile and yet may make mega-profits.
Sitting between these two archetype investors is the middle-of-the-road investor who’s probably very balanced and pragmatic and wants a bit of the best of both worlds!
Many investors naturally think that they’re middle-of-the-road, medium-risk investors with a penchant for terms such as ‘balanced’. That may be true some of the time, but you need to also understand your retirement requirements, which could make your investment strategy more or less risk averse, regardless of your personal attitudes about risk.
If you want to live a wonderful retirement with lots of cruises and trips around the world, you require lots of income and that means a large nest egg, which may force you to increase your level of risk and buy more adventurous funds. Equally you may have other forms of income coming in your retirement, which means that you can afford to take risks with your savings pot.
The reverse is also true. You may be in your thirties and willing to shoot the lights out in terms of risk but have no other assets to act as a cushion (second homes or soon-to-be-deceased aunts) and so you may take a more cautious attitude to risk.
Also, many families save money in their forties for school or university tuition fees. Such investors may start off adventurous but end up very cautious.