Consumers must understand savings and investment risk

A new report indicates that users of savings and investment products need a deeper understanding of how risk can be managed in stock market investments.

The insurance company MetLife has revealed that the recent fluctuations in stock markets have considerably unsettled almost half of all savers. 

Of those with cash invested in stock markets, 47% said only a guarantee that their original investment was safe would significantly reassure’ them about their investments and pensions.

At the same time, just 11% of users of savings and investments products said that a guarantee would make no difference to their investment risk attitude. 

Managing savings and investment risk

Users of savings and investment products need to understand that fluctuations and cyclical movements are a constant and integral part of stock market investments. 

They need to be aware that, despite these short-term fluctuations, stock investments generally outperform cash investments, when looked at in the longer term (i.e. over 15 years). 

When helping a client to put together a financial plan, the best financial advisers will first assess the client’s attitude to investment  risk, by asking questions that will provide information for a ‘risk profile’ of that client. 

At Principle First we categorise our clients as very defensive, defensive, cautious, balanced, moderately aggressive, or aggressive, depending on how much, or how little, risk they are willing to take. 

Those less comfortable with risk will fall into the first three of the above categories, and we build them a tailored financial plan that will keep the level of risk well within their desired range.

Their low-risk portfolio might then feature a conservative savings and investments strategy focussed on cash, property, and gilts, with the option of a small element of exposure to UK stock markets for those in the ‘cautious’ category.

For the more adventurous client we provide the balanced, moderately aggressive, and aggressive portfolios. The latter category addresses the needs of the client who is willing to take on a higher level of risk in the hope of higher-than-average returns. This client may be interested in investing in the relatively high-risk emerging markets economies, such as China, Russian, Vietnam and Indonesia.

*Survey conducted for MetLife by ICM Research among 2,038 UK adults