What risk type are you?
Image: Paul Edmondson (Stocksy)

Anyone who invests money should feel comfortable with their investment. The best way to ensure that they do is with an investment strategy tailored to their personal situation and specific financial needs. A client’s risk capacity and tolerance and, consequently, the expected returns play a key role in the advisory process.

Risk capacity can be calculated, with the investment horizon and capacity for loss being among the key factors. It expresses how high potential losses may be while still being bear able. Loss capacity corresponds to the share of free assets in a person’s total liquid assets. This is what remains after deduction of planned expenditure and reserves for unexpected events from the assets that are available for immediate use.

Online test reveals more

However, the fear of a possible loss that is just about bearable can still keep an investor awake at night and that is precisely what risk tolerance is about. This quality is specific to the individual and is influenced by various cultural factors. “We know from a range of studies that women have a lower risk tolerance than men in 95 percent of countries,” says behavioral economist Andreas Staub from FehrAdvice & Partners. Another proven fact is that appetite for risk decreases with age – which indicates that risk tolerance should be reviewed on a regular basis. Clients who obtain investment advice from UBS can use – among other things – the Financial Personality Test to ascertain their risk tolerance. The test can be taken online at any time. Its basic goal is to work out how conservative or aggressive the investment strategy can be.

In the advisory process, personal risk appetite is one stage on the path to agreeing on an investment strategy. Andreas Staub sums up why it is important: “If the strategy is too aggressive and losses occur, the client will be unhappy. However, he will also be unhappy if he feels that he has lost out on potential profits.”

. . . finding the perfect time is impossible.
Andreas Staub

A subject that is related to risk tolerance is effective market risk. Looking back, the returns on broadly diversified portfolios with long time horizons have been positive in the vast majority of cases – this means that the risk of loss is particularly high when investors have to sell quickly due to time pressure. The time to make an investment is also subject to certain risks, but in the words of Staub, “finding the perfect time is impossible.” For that reason, regular deposits by standing order in an investment are a further answer to market risks, in addition to the time horizon.

Your risk profile

Determine yours easily with the UBS Financial Personality Test