What kind of risk-taker are you - the low-risk investor

Published by Cherry Reynard on 07 November 2011.
Last updated on 23 November 2011

Cube with question marks

In the old days, before banking crises, downgrades and double dips, deciding your asset allocation was pretty easy. If you were low risk, you built a portfolio of safe-as-houses government bonds; if you were medium risk, you blended in some UK equity holdings; and if you were high risk, you focused on stockmarkets.

But the current economic climate has turned traditional assumptions about risk on their head.

Now, investors have to be clear how much risk they want to take and the amount of volatility they can tolerate. As such, the first port of call is to decide on your risk profile.

Moneywise has compiled a short, and not entirely serious, quiz to point you in the right direction:

ONE: If your investment lost 20%, how would you feel?

a) Mortified. We'd have to sell the house/car/guinea pig and change the children's schools.
b) Not that pleased, but it wouldn't significantly affect our long-term plans.
c) Sanguine - it's a chance to top-up in some exciting areas and potentially make more cash in the long run.

TWO: Do you need an income?

a) Yes, we need a consistent reliable income for day-to-day expenses.
b) Everyone likes a bit of income, but it won't leave us impoverished if we don't get it.
c) Nope, just punchy capital growth for me - I get my income from somewhere else.

THREE: How long is your time horizon?

a) Very short. We need a new kitchen/car/guinea pig next month.
b) We need a new kitchen/car/guinea pig in three to five years' time.
c) We don't need a new kitchen/car/guinea pig. We are investing for 15 to 20 years.

FOUR: What are your favoured leisure activities?

a) Gardening, listening to Radio 4 and maybe a gentle bike ride.
b) Jogging, online shopping, eating an occasional Mars Bar and glugging a glass of wine.
c) Bungee-jumping, driving fast cars and vodka shots

FIVE: Are you worried about your job?

a) Yes, as a Greek public sector worker, I am feeling the pinch a little.
b) My company isn't doing brilliantly, but I feel OK for now.
c) I'm a tax inspector, so I'm feeling pretty secure.

SIX: Do you have dependants?

a) Where do I start? There's my spouse, four children, the guinea pig, the elderly parents and next-door's cat...
b) Just the usual, partner and couple of kids.
c) No, there's just little, old me.


In case you hadn't guessed, if you scored mostly As you are low risk; mostly Bs makes you medium risk, while mostly Cs makes you high risk.

That's the easy part. The difficult bit is trying to decide where that leaves you in terms of your overall asset allocation.


It is perhaps the lower-risk investors for whom things have changed the most. Usually, they would be invested in a blend of lower-risk government and corporate bonds, maybe a commercial property fund, plus some cash and perhaps a small allocation to blue-chip equities. The trouble is that government bonds no longer look low risk.

Marcus Brookes, head of multi-manager at Cazenove Capital, says: "The price of gilts suggests we're going into a deflationary bust. If that doesn't happen, there's potential to lose a lot of money in gilts. If investors are whipsawed by a policy decision, they could lose 20% in a week."

Mark Dampier, head of research at broker Hargreaves Lansdown, agrees: "Government bonds have traditionally been seen as risk-free, but they are only risk-free if you believe in a Japan-style deflationary decade ahead, and I don't think that's coming. If UK bonds went to where Italian bonds are - and the debt differential is not so great - they could lose a lot of value very quickly."

So what should low-risk investors do instead? Darius McDermott, managing director of Chelsea Financial Services, says that if investors really can't bear the volatility in markets, they will simply have to go to cash. He adds: "Up until 2008, bonds would have been my first port of call, but many corporate bond managers have big chunks in bank bonds."

Dampier also recommends a reasonable weighting in cash, not least so that investors can take advantage of investment opportunities as the economic mist clears.

Possible investments: M&G Optimal Income, Jupiter Absolute Return, Majedie Tortoise Cash

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