On a scale of 1 to 10…

Risk

Risk (Photo credit: avyfain)

If you ever want investment advice – especially if you reside in the UK, an advisor will ask you to fill in a survey all about risk. I understand why these surveys exist, after all, the advisor needs to make sure you understand the concept of risk versus reward and pitch investment advice to you that is appropriate to how you feel.

By necessity, the survey is relatively simple consisting of statements like “Compared to the average person, I would say I take more risks” and you then tick a box to show how strongly you agree or disagree with the statement.

But who’s the average person and what do you consider a risk? I wouldn’t try anything like skydiving and I’m not too keen on the idea of deep-sea diving, but I do recognise that any kind of reward comes with risk. There’s even a risk of doing nothing because depending on your situation, the lack of action could leave you considerably worse off. If you’re standing in a burning building, you probably take a different view on the risk of jumping out the window.

I find such forms very difficult to fill in because my answers to the questions can vary wildly depending on which aspect of my life you are talking about. I have a very different attitude to the risk I take when I buy a £2 lottery ticket compared with one of those £50 tickets at the airport to win a car. It depends on so many factors; the amount of outlay, the potential reward and the likelihood of winning (or as is more often the case – losing).

When it comes to investment, it’s even more complicated. My attitude to risk changes with timescale, so I have a different attitude about the investment that’s supposed to pay off my mortgage compared to my retirement fund. The age at which you can retire in this country is galloping over the horizon so I’m fairly relaxed about taking some risk because a lot can happen between now and then.

It also depends on where in the world you are talking about. We have people in the western world doing essentially the same job as their counterparts a few thousand miles to the East, but we earn orders of magnitude more money. There is a considerable rebalancing that’s going to play out over the coming years which will affect the likelihood of growth in each area. Asser class makes a difference too. We have a saying “safe as houses.” I imagine many people across Europe and America take a very different view about the relative risks of investing in housing since the sub prime market imploded five or six years ago.

And it interest rates start going up or America decides that what the world really needs is another war – it will all change again. Maybe I’ll fill out 10 different forms.

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