Q. I have recently had a windfall from an inheritance. After paying off all debt, I have a substantial sum left which I want to invest over say 15 to 20 years to help towards my retirement.
This is a new one for me as I have never seriously invested before, so I thought it sensible to approach several financial advisers for their opinion.
All had different slants on what I should do, but the one thing that struck me was that they did not spend much time talking about my attitude to risk. I am very wary of the stock market, but am attracted to the chance of long term gains.
So, having explained this to the advisers, I expected a good 20 or 30 minutes on examining risk. But we spent just a few minutes on this and really it just involved filling in a small questionnaire.
I have read further on this, including articles on your website, and they all seem to make more of this element.
Could you clarify?
A. This is a topic that is so vital to get right! Lets face it, this money is crucial to your future security and therefore getting the risk profile right is important so that you are not worrying too much about how the stock markets are performing.
Of course, different advisers will have their own approach but from what you have said we dont blame you for being wary. Perhaps it is best to answer your question by briefly describing how we would approach this, and further information can be found with the links below.
The first thing we do is look at your overall situation. What are your goals in life and when do you want to have achieved them? This involves building your own financial roadmap that compares your assets against your expenditure, and forecasts how your finances will look over the next 20-30 years. If this looks healthy, then why not spend or gift more, or perhaps retire earlier?
If monies are still to be invested, then our clients fill in a psychometric risk questionnaire. This is available from a company called Finametrica. This has 25 questions designed to really get you to understand your risk profile, and is widely considered to be the best on the market. We then discuss the results and implications with you.
This then points us to a portfolio that matches your attitude to risk. We then take the client through a ‘stress test’. This replicates how your portfolio would perform if the markets were to drop sharply, using the 1973-1975 years as an example. No doubt this rings a bell as we have just gone through a similar period! You are able to see a very real picture of what would happen to your money in a volatile market. Could you handle this?
So, now having a portfolio that can be used, we take the presumed projection rate and use this in your financial roadmap. It is our experience that for many clients the picture looks good, and we can talk about them becoming wealth preservers rather than creators, meaning we can take another notch down in risk whilst still allowing the clients to achieve their goals in life.
We then review your portfolio year by year, and rebalance each year. This ‘resets’ the portfolio to the original template to keep it aligned with your risk comfort zone.
We hope this helps you!
Click here and here for some articles to read on this subject.
