The Business of Risk

tHe buSineSS OF riSK: HOW MUCH CAN YOU AFFORD TO PUT ON THE LINE?

Kerry Dwyer, Associate, Davy Private Clients / Heather Randles, Director, Davy Private Clients

The outbreak of Covid-19 has put the spotlight on the concept of risk in a way that has left us with little else to talk about. Research and human experience show that we are a deeply risk-averse species and suddenly the world seems a much riskier place which is deeply unsettling.

How much risk can we take? The reaction of the financial markets has been nothing short of panic. But investing money has always involved taking on risk factors – inflation, currency, timing, market or liquidity risks. If we want to earn higher returns, we must consider to be able to accept a level of risk.

When it comes to putting our money on the line, we are generally poor judges of how much risk we can take. The solution is to put all emotions to one side. It can be done by developing what’s known as ‘risk literacy’ which is simply the capacity to deal with uncertainty in an informed way.

Developing risk literacy Risk literacy is a framework that helps us make sensible decisions when the outcomes are uncertain. For example, if we’re told that our investments may be down 30% of the time or up 70% of the time, which sounds riskier? It amounts to the same message, but the different framing is likely to provoke two different reactions.

How much risk can you afford to take? You will first need to look at your needs and goals. Today’s goals are really just our best guess around future expenditures. They help us better understand when the assets we have today, plus the savings we make in the future, will be spent. This in turn helps us allocate risk in a more sensible manner. Taking the time to articulate our goals means we are equipped to understand the real impact of market events on what matters most to us personally. When it comes to short-term objectives, there is little or no risk affordability. With long-term goals, it’s different. Here, you really should be taking on more risk in order to grow your pot over time. And if the market declines during that period, you’ll likely have time to make it up. However, conversations around diversification and asset allocation are necessary.

Adopt a long-term, consistent approach With the outbreak of Covid-19 sending equity markets into turmoil, investors’ risk tolerance has truly been tested. Taking a long-term, consistent, dispassionate approach is generally the best investment approach. But when the going gets tough, our hard-wiring kicks in and we feel the urge to cut our losses and get out.

Getting the right balance of risk and return is not an easy task. When deciding your risk budget, you should bear three key points in mind: what amount you could afford to lose in the worst-case scenario; how much growth you are targeting; and the time span you want to get there. The ‘right’ balance is a strategy that diversifies across equities, alternatives, bonds and cash, and one you can adjust as time passes. Markets will go up and down, goals may change over time, and when your investment horizon shortens, you might want to move into lowerrisk strategies.

Remember that the world has recovered from crisis before and will hopefully do so again. If you are in the business of investing, then taking some risk is essential.

At Davy, we’ve a team of experienced advisers ready to help you, especially during these challenging times. Why not request a no-obligation call with a member of our team today?

Visit davy.ie/cork or call us on +353 21 425 1420.

The information in this article does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. you should seek advice in the context of your own personal circumstances prior to making any financial or investment decision from your own adviser.

NEW DIRECTIONS NEED STRONG COUNSEL

Our world has been turned on its head. We all work differently. We all interact differently. We all do our business differently. But the wheels of commerce still turn. Transactions are still being negotiated and are completing. Disputes are resolving and businesses need legal advice, more than ever. You need to partner with someone who knows how to navigate not just the world as it was, but the world as it is now. A different world where a whole lot is still happening, but differently. We know “differently” and we can help you.

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