Ask yourself questions about your attitude to risk

Imagine you invested £7,000 just 6 months ago. There is some unexpected news, and the stockmarket, and the value of your fund falls to £4,900, down 30%. How would you feel?

• would it cause you grave concern and worry? Or …

• would you be relatively relaxed, because you are comfortable continuing to take at least a 5 year view?

Even if you are relatively well off, with secure income, such falls may still give you sleepless nights – how you might react is a very personal matter.

“My funds have fallen 30%!!”. If this would be a shock you would rather not experience, sell or reduce your risk investments. It might mean you miss out on a continuing recovery – or that you don’t suffer further sharp losses, but that isn’t the point. Whether you should remain invested is about you and your attitudes, not about markets. You need to make a hard-nosed decision about whether you can cope with risk investments, and crystallising losses should be regarded as the price of experience.

The stockmarkets can and do play games with your mind, in particular with the powerful emotions of fear and greed. Some investors may just need assistance to think a little more rationally.

For example, do you have secure income, more than enough on deposit for peace of mind, and no debts? Just re-affirming this will help many stop worrying. But if despite this high level of personal financial security you still can’t sleep at night with the possibility of your investments falling sharply, you should sell, whatever you might think about the stockmarket and its potential.

This is a very basic approach to figuring the level of risk with which you are comfortable, and there are more formal approaches for testing your risk tolerance, which would ask questions such as:

• do you think of risk as uncertainty or opportunity?

• are you more concerned about possible gains than possible losses?

• when things have gone wrong financially in the past have you adapted easily or uneasily? have you looked for someone to blame?

If you would like to go through a more formal risk tolerance test, do get in touch, and we will let you know the details and cost.

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