Scott Tominaga, who has over twenty years’ service in Financial Services mostly working in compliance and what is known as the back office, or behind the scenes, discusses the nature of risk.
When a Financial Advisor sells a product, they have to ensure that it matches the clients risk profile. That’s to say that it has the right amount of chance of winning or losing based on what they are willing to risk. The concept of understanding risk isn’t a majorly complex one but the actual practice of it is much more complicated and emotional. Basically, it is determining how much risk you are willing to take in order to profit whilst bearing in mind how much you can afford to lose if it all goes wrong. The higher the risk of winning; the higher the risk of losing. The intellectual understanding is very different to watching a stock that you have invested a lot of money in begin to fail day by day. You may also have the added pressure of knowing when to pull the plug on the investment.
Cash is often considered a safe investment but in real terms it may actually be worth less when it is cashed in than the original amount invested. One type of investment that can go wrong is jumping on the bandwagon. Watching people win big and then investing in what they invested in, quite often by this point you have missed the boat on the money to be made. When investing you must concentrate on your long-term objectives and try to have a portfolio to match both your goals and your risk category. Each person has a unique perspective and risk profile. Each investor has a timeline that their cash can be tied up for and each has a level of risk that they are willing to take. It is also wise to consider your family and responsibilities when making these kinds of decisions.
Investors need to also prepare themselves for what is known as market volatility, this is the fact that the share value can go up and down but that it will even out and obviously hopefully excel. This is the reason why you should not watch your investments on a daily or weekly basis. Monthly is considered more than frequent enough. When investors are unable to come to terms with these fluctuations they will inevitably choose low risk investments which may not actually suit their beliefs or aspirations.
The Financial Advisor needs to compare the level or risk and the level of gain and fully explain this to the client and if they are really risk averse they need to be aware that there is not really a chance of them making big money. They often explain this by confirming how long they can tie their capital up for and what it would need to make in that time for it to be considered a good profit. A mixture of different types of products is always a good recommendation as then if some fail some will not and thus the successful investments will counter some of the losses.