An interview with
Jacob Rudman
Jacob Rudman is an Independent Chartered Financial Planner from Shipman Financial Planning, part of the Amber River Group. He’s passionate about helping his clients to understand how risk can affect their investments in positive and negative ways.
We asked Jacob to give us his top 5 investor tips on managing risk successfully, and here’s what he said:
As Mark Zuckerberg once said: “In a world that is changing really quickly, the only strategy guaranteed to fail is not taking any risks”. But from an investment perspective, what risks are worth taking, and which risks should you stay away from? To answer those questions, it’s probably best to start with a definition of risk.
What to consider when determining your level of risk
As a financial planner, I regularly talk to my clients about what they understand risk to involve. For me, risk falls into two main categories. The first is your tolerance for risk. In other words, how willing are you to tolerate shifts in the value of your investments, in the pursuit of higher potential returns? The second risk is your capacity for loss, which determines whether you are financially able to cope with short-term losses in exchange for better returns over time.
For example, if you have a higher risk tolerance, you will probably be more comfortable investing in higher risk asset classes, including equities. These higher risk asset classes will suffer from occasional bouts of short-term volatility but, over time, are likely to achieve a higher investment return than more cautious investments. If you have a lower risk tolerance, you will most likely prefer to invest in lower risk assets such as bonds.
But if you have a higher risk capacity, this means that you can literally afford to take more risks with your money. You can invest in higher risk assets because losing money will not affect your personal circumstances too much. People with a lower capacity for risk simply cannot afford to be cavalier with their investments, because losing money could have a significant financial impact for them.
Your risk capacity can vary quite significantly at different life stages
Why it’s important to understand risk tolerance and risk capacity
Your risk tolerance might not change too much over the course of your life. However, your risk capacity can vary quite significantly at different life stages, and will often depend on your personal and financial goals, and the time you have available to achieve them.
There will be times in your life when your outgoings (mortgage, raising children, or your career journey) make you less capable of riding out tougher times for your investments. At the same time, an increase in your income, your children leaving the family home or paying off your mortgage could change your risk capacity for the better.
Risk tolerance and risk capacity are two vital pieces of the puzzle when it comes to working out your overall financial plan. Once you have an understanding of these two concepts, it’s much easier to develop a plan that takes them into account and enables you to reach your longer-term goals.
Your objectives will help determine the risks you should be prepared to take
Of course, any investment carries an element of risk – after all, the value of investments can fall as well as rise, and you may not get back the full amount invested. But it’s important to recognise that the amount of risk you are prepared to take will have a direct impact on the returns your investments are likely to achieve.
You don’t want there to be a gap in terms of the level of risk you are prepared to take, and those risks you should take to get to your end goal. When it comes to managing risks with your investments, here are my top five suggestions.
Tip 1: Review investments regularly to make sure you're invested in the right funds
Holding onto poor-performing investments for too long can have a damaging impact on your long-term wealth. It’s important to review your holdings to assess their performance or to determine whether there might be better investment opportunities elsewhere. But it’s always worth having a discussion with a qualified financial planner before making any investment decisions.
It’s not about timing the market, but about time in the market
Tip 2: Take a balanced approach
If you are worried about the amount of risk you should be taking with your investments, then you should think about applying a ‘balanced approach’. Ideally, you want your investment portfolio to balance risk and return by investing in a range of different asset classes.
Before agreeing the most sensible approach, your financial planner will review the main asset classes and design a strategy that is suitable for you, taking account of your current position. Here at Shipman Financial Planning, this is backed up by our investment team who monitor fund performance and charges.
Tip 3: Buy and hold is best
There’s a well-worn investment saying: ‘It’s not about timing the market, but about time in the market’. What does it mean? Well, research shows that staying invested over the long run is a much more successful strategy than dipping in and out and attempting to guess when markets have reached their high or low point.
At the end of the day, no-one can predict the ideal time to buy or sell an investment. Most investors will likely be better off buying and holding good quality investments, rather than trying to trade them and getting their timing wrong.
Tip 4: Tax-efficiency is important
There’s a well-worn investment saying: ‘It’s not about timing the market, but about time in the market’. What does it mean? Well, research shows that staying invested over the long run is a much more successful strategy than dipping in and out and attempting to guess when markets have reached their high or low point.
At the end of the day, no-one can predict the ideal time to buy or sell an investment. Most investors will likely be better off buying and holding good quality investments, rather than trying to trade them and getting their timing wrong.
Tip 5: Stick to your plan
It can be difficult to hold your nerve during times of market volatility, especially when you see that investments have fallen in value. It can also be tempting to cut your losses, or even to invest in higher risk assets – known to gamblers as ‘chasing your losses’. But a financial planner will be able to help create a long-term plan resilient enough to withstand short-term periods of weakness, and well-placed to benefit from longer-term growth.
Building an investment strategy around you
Our approach recognises that everyone’s attitudes towards risk are different, and that the best investment strategy is one that reflects a person’s specific goals, attitude to risk, financial situation and individual circumstances.
Get in touch
To speak to us about your investment goals, or to arrange an appointment, call 0800 915 0000, or alternatively use our contact form here.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
To learn about the government’s most recently-announced changes, please read our latest budget roundup: 2024 Autumn Budget Update
