A well-structured financial plan begins with a clear understanding of risk. At EQ Investors (EQ), we view risk not as something to avoid, but as something to manage deliberately and intelligently in pursuit of long-term objectives.
Risk is the price paid for growth. The key is ensuring that the level of risk taken is appropriate, intentional and aligned with your goals.
What really determines your risk profile?
Your risk profile is built from four core, interrelated elements, which define both your financial capacity to take risk and your emotional willingness to do so.
1) Attitude to risk
This reflects your emotional tolerance for market fluctuations. Markets do not move in straight lines. Understanding how you would react to a 10-20% market correction is essential, as emotional decision-making can undermine long-term returns.
2) Capacity for loss
Separate from attitude, this considers whether a temporary fall in value would materially impact your financial security or lifestyle. A well-structured financial plan ensures that essential spending is not dependent on volatile assets.
3) Time horizon
Time is one of the most powerful risk-management tools available. Longer time horizons allow portfolios to absorb short-term volatility and benefit from the compounding of returns.
4) The need to accept risk
In many cases, a degree of growth is required to meet long-term objectives, particularly after accounting for inflation. Avoiding risk entirely may mean failing to achieve those objectives. On the other hand, you may have more money than you will ever need, and you may ask yourself why you need to accept more risk in the hope for more returns.
At EQ, we consider all four elements before recommending an appropriate portfolio structure.
What risk really means?
In investment terms, risk primarily refers to volatility, the extent to which portfolio values rise and fall over time.
Short-term declines are an inherent feature of capital markets. However, history demonstrates that diversified exposure to global growth assets has been rewarded over the long term.
It is important to distinguish between temporary volatility and permanent capital loss. A disciplined, diversified approach is designed to mitigate the latter while accepting the former as part of long-term investing.
How we construct portfolios
EQ portfolios are constructed using a disciplined asset allocation framework. The blend of assets determines both the expected return and the expected volatility of a portfolio:
Growth assets: equities
Equities provide long-term capital growth. Our portfolios focus predominantly on listed companies with strong governance, liquidity and transparency. These businesses form the core engine of long-term returns.
Defensive assets: fixed interest
High-quality bonds and other fixed income instruments help dampen volatility and provide resilience during periods of market stress.
Cash
Cash provides stability and liquidity for short-term requirements but is not intended as a long-term growth solution.
We believe diversification across geographies, sectors and asset classes is fundamental. Rather than attempting to time markets, portfolios are structured strategically and rebalanced.
Understanding relative risk
Asset class labels can be misleading.
Equities are categorised as ‘high risk’ from a regulatory perspective. However, there is a broad spectrum of risk within equities themselves.
For example:
- Large, established global companies
- AIM-listed smaller companies
- Emerging market equities
These all fall under the equity classification, yet their risk characteristics differ materially. Smaller companies and emerging markets typically exhibit higher volatility and greater uncertainty than established global leaders.
Understanding this distinction is crucial. Two portfolios may both be described as high risk on paper yet behave very differently in practice.
Planning ahead to manage risk
Risk management is not solely about asset allocation, it is also about cash flow planning.
Where capital is required for known expenditure within the next 12-months, we advocate moving those funds into cash in advance. This avoids the need to sell growth assets during market weakness.
Being forced to sell during a downturn crystallises losses. Planning ahead reduces this risk significantly.
The risk of taking too little risk
While market volatility is often the focus of concern, insufficient growth presents its own long-term danger.
Excessive allocation to cash or low-return assets can erode purchasing power over time, particularly in inflationary environments. For long-term investors, failing to generate adequate returns may result in falling short of financial objectives.
The objective is not to minimise volatility at all costs, but to take a level of risk that is proportionate, controlled and aligned with your long-term plan.
A disciplined, long-term approach
At EQ, portfolio construction is grounded in evidence, diversification, and discipline. We do not attempt to predict short-term market movements. Instead, we design portfolios that are robust across economic cycles and aligned with your personal risk profile.
Your risk profile should evolve as your circumstances change. Regular reviews ensure your portfolio remains appropriate and aligned with your goals.
Understanding your risk profile is not a regulatory exercise, it is the foundation of a successful long-term investment strategy.
If you would like some advice on your current situation, please get in touch.
Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, in order to determine the risks associated with the investment and its suitability.
