Risk Vs Reward – Understanding your Risk Appetite

When we hear the word ‘risk’ in relation to money, it’s understandable to have the immediate reaction of ‘not for me, thank you!’. However, in the world of retirement strategies, taking a little bit of risk isn’t necessarily a bad thing. In fact, it could be quite the opposite.

That said, we’re not suggesting you should just select any random pension product because it presents an element of risk. The amount of risk you take on must be carefully considered and calculated. After all, we all have different needs and goals. Therefore, the level of risk we each want to take on will be different.

But how do you know the risk you’re willing to take and which pension products are for you?

It all comes down to your risk appetite…

What is your Risk Appetite?

Your risk appetite is the amount of risk you are willing and able to incorporate into your retirement strategy. Simply put, risk is about tolerating the potential for losses.

To start calculating this, you should first ask yourself how you picture your retirement; after all, once you know what you’re aiming for, it’s far easier to understand how much you’ll need in order to achieve it.

Following this, you can consider your current financial situation and how it fits into your future plans. How much have you already saved into your pension? How much more do you need in order to achieve the type of retirement you want?

And finally, ask yourself whether you could afford to experience any dramatic changes to your financial situation. For example, if you were to experience any loss in income or if the value of your investments fell, would you be able to comfortably keep afloat until the situation stabilised?  

All these considerations need to be made when calculating how much risk you are able to take on in your retirement strategy. After all, no investment is entirely risk-free, so deciding on your attitude to risk is essential, as it will inform how you approach your retirement strategy. 

Risk in Practice

For some, flexibility and potential for continued growth might be the priority within your retirement strategy. In which case, a flexible access drawdown (FAD) could be the right choice for you. FADs allow you the flexibility to choose your income while leaving the remaining money invested in a portfolio. As your money is invested, there is room for future growth; however, the fund can fluctuate depending on the performance of your investments.

The amount of fluctuation tends to depend on the portfolio’s risk level—generally, the higher the fund’s risk, the higher the potential to offer more substantial returns. However, high-risk funds are more likely to fluctuate, so their value could also decrease. In contrast, a lower-risk fund can be more stable, but the growth potential is also lower. 

It’s also important to note that the past performance of portfolios, regardless of their risk, is not an indication of future performance. So, don’t get swept up in the excitement of a portfolio which has performed well over the previous decade, as you might find yourself with the wrong amount of risk in your strategy.

Instead, it could benefit you greatly, to consult an expert for some advice.

Finding your Risk

Many things can affect your risk appetite, including your current income, family situation, or simply aging. Understanding your risk appetite helps you avoid being caught by a volatile market, where panic can lead to poorly timed and sometimes costly decisions.

Assistance is on hand in the form of advice to help you navigate your approach to risk. Here at My Pension Expert, we’ll help you calculate your risk appetite and find the right retirement products for you. We’ll make tailored recommendations to suit your needs; for some, this could be a higher-risk portfolio, and for others, a low-risk annuity.

Your risk appetite is just that, your own. No two approaches will be the same, and it’s essential to understand your comfort to help you achieve your retirement goals. Speak to the team at My Pension Expert to create a retirement strategy with the right level of risk to suit you.

They must also consider their circumstances now – so, if they decide to pursue some investments, would they be able to afford losing a proportion of it, if markets fluctuate? This will all feed into their risk strategy