Psychological research suggests our background and the way we are brought up has a profound influence on our lifelong attitudes to money. Those from well-off homes tend to be spendthrift even when money is short. Those from poorer backgrounds can still feel anxiety relating to their childhoods even when they don't have to worry about money.
Doctor Dorothy Rowe, a psychologist and author of The Real Meaning Of Money (Harper Collins, pounds 7.99), says: "People like me who come from a family where money is short still see it in terms of something that can disappear in adult life. When I'm short I go by bus, but lots of people from different backgrounds seem quite happy to chalk up debts on credit cards."
She also emphasises how financial planning can be complicated by contrasting attitudes to risk within relationships. Dr Rowe's research has found that most partnerships consist of an introvert and an extrovert who are drawn together because their attitudes complement one another. And that includes how they handle their finances.
"The extrovert sees security largely in terms of relationships with other people whereas the introvert sees it in terms of having some control over the future and tends to be more prone towards trying to make successful long-term investments."
If you are doing your own financial planning, be aware of your prejudices. A good independent financial adviser (IFA) will also get clients to talk about their attitudes to risk before making any recommendations about financial planning.
Mark Taplin, a partner at IFAs MacDonald Taplin in Leamington Spa, says: "Advisers can only act on what you tell them, so make sure you let them know what you want. Talk about your fears, feelings and aspirations. We've got to try to get into the client's head, and the more doors they leave open the better."
You face two main risks when you hand over your money to someone else to manage. One is the danger of losing your capital, so you get back less than you put in. This is relatively easy to understand even if you are unsure how to guard against it.
The other type of risk, which is not so easily understood, is that of losing value for money in the long term by failing to ensure that investments keep pace with inflation. Building societies are always keen to point out that no one has ever lost a penny in one of their accounts. But these accounts arguably represent one of the riskiest forms of investment because they have never kept pace with inflation over the long run. The value of your savings is eroded over time.
Before you think about risk, take your age into account. Even if you are a cautious person in your 20s, there is little point in investing all your pension contributions in a low-risk fund. In the very long term, shares are a safer bet. If you can't stomach that, at least go for a halfway house between cash and shares, such as a life insurer's managed or with- profit fund.
A growing number of people also challenge the received wisdom that you should switch to lower-risk funds as you near retirement. We need to generate much larger sums of money to see us through a retirement that can last 30 or 40 years. So get used to taking a chance.
Be realistic about the returns from your money. Research suggests most people expect their own investments to perform better than average. For example, "A Portrait of the Individual Investor", by Werner De Bondt, published in the European Economic Review 42 (1998 Elsevier Science), details a study of 45 individual American investors who each managed an equity portfolio. They agreed to make weekly forecasts of the Dow Jones Industrial Average and the share prices of one of their main equity holdings. The study found little difference between the actual and predicted performances of the Dow Jones. But when it came to their own shares, investors were significantly over-optimistic.
One of the consequences of cross-border investment is that the behaviour of different stock markets becomes interlinked. Over half the movement in the UK market can currently be explained by a movement in the German market, and vice versa. During the 1970s only a quarter of each market's movement could be explained this way.
The change means that those investing in both markets get far less chance to spread their risk than they used to. As the global economy becomes more closely linked, we'll all have to cope with extra risk caused by factors outside our control.
n IFA Promotion can provide details of local IFAs in your area. Tel: 0117-971 1177.
THE PREMIER RISK TABLES
Risk Grade 1
Bank and building society deposits
Cash and fixed-interest unit trusts
Short- and medium-dated gilts
Property unit trusts
Risk Grade 2
Managed life funds
Managed pension funds
Fund of funds unit trusts
Risk Grade 3
UK equity life funds
International equity inc unit trusts
Diversified unit trust portfolios
UK equity and bond unit trusts
Risk Grade 4
UK equity & international pension funds
European unit trusts
Venture capital investment trusts
International equity growth unit trusts
UK equity including unit trusts
Risk Grade 5
UK growth and income unit trusts
UK equity growth unit trusts
UK smaller companies unit trusts
Diversified UK equity portfolios
Risk Grade 6
UK capital growth investment trusts
Medium cap equity portfolios
North American unit trusts
UK general investment trusts
Risk Grade 7
Smaller companies investment trusts
Far East (including Japan) unit trusts
European general investment trusts
North American investment trusts
Risk Grade 8
UK smaller companies inv trusts
Commodity and energy unit trusts
Japan unit trusts
Far East (including Japan) inv trusts
Risk Grade 9
High income investment trusts
Emerging markets investment trusts
Japanese investment trusts
Property investment trusts
Risk Grade 10
Far East investment trusts
Investment trust warrants
Source: Premier Fund Managers