Risk
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Risk has four primary aspects that are discussed when we sit down with you.
Risk perceived - how risky the action feels to you
Risk tolerance - the risk you would normally choose
Risk required - the risk associated with the return required to meet your objectives
Risk capacity - the risk that you can afford to take. This will ultimately drive your strategies.
Risk perception generally relates to how much you know about investment markets and their tendency to follow a roller-coaster path that is not always comfortable. We tend to be more afraid of things we know very little about. Those who have a high degree of knowledge about financial markets tend to see them as less risky.
Risk tolerance expresses how you feel emotionally about taking risk. Where do you strike the balance between getting a favourable outcome versus and unfavourable outcome? Analysis suggests risk tolerance slowly decreases with age, and personality traits are known to be affected by major life events, good or bad. However, it appears that risk tolerance neither collapse in bear markets nor soars in bull markets. We see that people tend to accept risk in bull markets and avoid risk in bear markets. What we are talking about here is often linked to misunderstandings about how markets work in the long term.
Risk required This is often overlooked and relates to the returns that you need to meet your objectives. The higher the return required the more risk might have to be taken, and this need may override your perception and tolerance. On the other hand, you may choose to amend your future plans in line with your attitudes.
Risk capacity has do do with whether, for a given level of risk, your financial situation can withstand the impact of a market decline without suffering an unaccptable loss of lifestyle now or in the future.