Is the biggest risk to take no risk at all?

Posted by Liz Rees in Portfolio management category on 14 Mar 16


Financial Risk

How much of a risk-taker are you when it comes to your finances? Before you answer that question, here’s another to consider: what do we mean when we talk about financial risk? For many, the concept of risk with important savings and investments may not be the same as risk when it comes to riding a motorbike or skiing. However, much like in other walks of life, the amount of risk we feel comfortable taking with our savings and investments is personal to us.

For the last few years we have commissioned a leading national polling firm to ask a representative sample of the UK population about their attitude to risk. We’ve done the same again this year and what’s interesting is that over the last 12 months, even though people remain largely confident about the economy and their own finances, uncertainty caused by market volatility and the pace of growth in many major markets has dented appetite for financial risk.

  • 15% of people say they are willing to take either a reasonable or substantial amount of financial risk
  • This is down from 20% in 2015 and only slightly higher than 14% in 2013
  • 45% are not prepared to take any financial risk, up from 40% last year
Financial Risk

Risk appetite had been growing among UK savers and investors, but the last 12 months has reversed the trend. Market volatility, oil price fluctuations, the prospect of an EU referendum and concerns about the pace of growth in major economies like the US and China have all created uncertainty. And we know that uncertainty tends to limit risk taking behaviour. This fall in risk appetite might also be evidence of investors getting their fingers burnt in 2015, when there were weaker returns than in previous years. 

Across the UK’s biggest cities we found big variations. London comes out as the capital for risk taking, with 25% of people happy to take reasonable or substantial risk when it comes to their finances. At the other end of the scale, only 11% of people in Glasgow, Leeds and Norwich feel comfortable with that level of financial risk.

Financial Risk

Approaching financial risk

There are numerous factors causing people to err on the side of caution – economic worries, a potential ‘Brexit’, for example - but the fact is that for many, some risk will be necessary in order to secure a decent return on investments.

Our research indicates that we all need to have a bigger, more open conversation about the potential value of sensible risk taking when it comes to our finances. For too many of us, adopting financial risk remains taboo. Latest figures from HMRC suggest that the total held in cash ISAs is just below £61bn, compared to just under £18bn in stocks and shares ISAs. Yet with interest rates set to remain low for a while, relying on cash savings won’t be enough for many. Some risk may be needed in order to meet long-term financial goals – a comfortable later life, or being able to support family.

Of course, investments may go down as well as up. But better exploration of the topic, and more openness about people’s hopes and fears around taking risks, will go a long way to helping us all establish what constitutes a sensible level of risk based on a thorough understanding of circumstances and financial goals. After all, it will differ for all of us. It may just be dismissing any prospect of financial risk out of hand could in fact be the biggest risk of all.

Understanding the options

For many, taking sensible risk only sounds palatable when we are comfortable we have researched options properly, understand the benefits as well as the potential dangers, and recognise how individual decisions around fund choices, for example, can be changed in the context of 20 or 30-year financial plans. Otherwise, fear of the unknown may prevail and it may just be easier to stick to safer ground.

One tool which may help you do this is Play Space. By simulating real investing but without using real money, it allows you test out different scenarios – including some which may involve more risk than others. There’s no guarantee that what happens once will happen again, but by trying out different scenarios in this safe way it can address any misconceptions about perceived risky strategies, and at the very least provide comfort that things aren’t as scary as they may sound!

Opinium Research conducted an online survey between 18-21 December 2015, among 2,012 UK adults aged 18+. Results have been weighted to nationally representative criteria. 

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