Money: How far will you go?

`Risky' investment may be all in the mind, writes Edmund Tirbutt

How much risk are you happy to take with your savings? And how do you define risk anyway? You may think you make rational choices about money but in reality your upbringing may have a lot more influence than you admit.

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.


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

Long-dated gilts

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

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
The programme was a look back at the Mad Men-y age of the Sixties and Seventies

Women born in 1950s facing severe financial hardship over pensions could have fates changed by Ros Altmann - should she choose to help

Women born in 1950s facing severe financial hardship over pensions could have fates changed by Ros Altmann - should she choose to help

PPI complaints were down by about a half

Banks face fresh wave of PPI compensation claims after landmark ruling

The PPI scandal has already cost Britain’s banks around £24 billion

Some experts warn that the bond sell-off may continue until the autumn, when the US Federal Reserve is expected to lift interest rates

Is it really that bad in the bond market?

The great sell-off has sparked fears for our pensions as well as bonds. Simon Read asks if you should keep calm or panic
Up and away: rates will rise but your mortgage won't escape its moorings with a long-term fix

Is a 10 year mortgage deal a fix too far?

A cut-price deal for a decade-long home loan - where's the problem? Only, says Simon Read, that circumstances can change and it won't be easy to get out
In a surprise move the Tories have decided against putting a career politician into the job. Instead they’ve handed the responsibility to campaigner Ros Altmann

New pensions minister has massive job on her hands

The Tories have appointed campaigner Ros Altmann to the post

Promises, promises: David Cameron talks to staff at Asda's head office in Leeds today

General Election 2015: How you vote next week could affect your finances

Rival party pledges could shrink your savings or grow your nest egg
Logos for the 'Big Six'; energy companies (top row from left) British Gas, EDF, RWE npower, (bottom row from left) SSE, E.ON and ScottishPower

Winter heating underpayment brings summer pain

One reader’s monthly direct debit charge has been increased by 62 per cent

Almost 15,000 people died last winter through living in cold homes that they couldn’t afford to heat

Social tenants locked into energy tariff for 40 years

Many Londoners who live in social housing estates are not allowed to switch because their landlord has ‘locked’ them in to buying from one supplier

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Digital Optimisation Executive - Marketing

    £30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

    Recruitment Genius: Financial Reporting Manager

    £70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Day In a Page

    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific
    In this the person to restore our trust in the banks?

    In this the person to restore our trust in the banks?

    Dame Colette Bowe - interview
    When do the creative juices dry up?

    When do the creative juices dry up?

    David Lodge thinks he knows
    The 'Cher moment' happening across fashion just now

    Fashion's Cher moment

    Ageing beauty will always be more classy than all that booty
    Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

    Health fears over school cancer jab

    Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
    Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

    'I forgive everyone, but I don't forget'

    Fifa president Sepp Blatter issues defiant warning to opponents
    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

    Weather warning

    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
    LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

    High hopes for LSD

    Meet the volunteer users helping to see if it cures depression and addiction
    German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

    Saving Private Brandt

    A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral