The Investment Risk You Took Then May Not Be Right Now

• The right level of investment risk can change as an investor’s life, goals and time horizon change.
• A portfolio can become too risky or too cautious over time, even if the investor has made few changes.
• Strong returns can create confidence, but they do not prove that the portfolio is still suitable.
• Risk should be linked to a clear outcome, such as long-term growth, retirement income, capital preservation or passing wealth to family.
• A no obligation call can help investors understand whether their current approach still matches their objectives and whether a more structured plan may be appropriate.

Many self-investors know what their portfolio has returned. Fewer can clearly explain whether the investment risk they are taking is still right for what they now need their money to do.

That is where problems can begin.

A portfolio that was suitable five years ago may no longer fit the investor’s current circumstances. Retirement may be closer. The portfolio may be larger. Income may soon be needed. Family priorities may have changed. The investor may still be comfortable with risk, but less able to absorb a large loss at the wrong time.

Markets can also change the risk level of a portfolio. A strong run from shares can leave an investor more exposed to equities than planned. A period of uncertainty can push others too far into cash or cautious investments. In both cases, the portfolio may have changed without the investor making a clear decision.

Investing is not simply about getting the highest return. It is about achieving the right outcome as efficiently as possible, using a level of risk that is suitable for the investor’s goals, time horizon and financial position.

That is the part many self-investors can miss. They may focus on returns, charges or individual fund performance, but not regularly check whether the overall risk still matches the outcome they are trying to achieve.

The FCA’s suitability rules for advised investment services focus on whether an investment meets a client’s objectives, risk tolerance, financial situation and ability to bear losses. Those same principles are useful for any investor reviewing their own portfolio, because risk should be judged in the context of personal circumstances, not in isolation.

This article is for general information only. It is not personal financial advice or a recommendation to buy, sell or switch any investment. Investments can fall as well as rise, and investors may get back less than they invest. Past performance is not a reliable guide to future returns.

Risk Should Start With The Goal

Many investors start with funds. They look for strong performance, low charges, well-known fund managers or popular investment themes.

A better starting point is the goal.

The question should be: what does this money need to do? For one investor, the goal may be long-term growth over 20 years. For another, it may be drawing income in retirement. For another, it may be preserving capital for a known future expense or passing wealth to family.

Each goal, and each investor, needs a different level of risk. A portfolio built for long-term growth may need to accept more short-term market volatility. A portfolio used for retirement income may need more control over withdrawals and market falls. A portfolio intended for a known expense in the next few years may need a much lower level of risk.

The same portfolio cannot be right for every outcome. Risk only makes sense when it is connected to what the investor is trying to achieve and how comfortable the investor is with it.

Life Stage Changes Risk

Investment risk should be reviewed when life changes.

An investor in their 30s or 40s may have time to recover from market falls, particularly if they are still earning and adding money regularly. An investor approaching retirement may still need growth, but a sharp fall can be more damaging if income withdrawals are due to start soon.

Retirement changes the risk question again. A portfolio used for withdrawals has a different job from a portfolio being built during working life. It needs to support income, manage volatility and reduce the risk of selling investments at a poor time.

Other life events can also change what is suitable. Receiving an inheritance, selling a business, helping children onto the property ladder, paying school or university fees, downsizing, or planning for later-life care can all affect how much risk should be taken.

The problem is that portfolios do not adjust automatically when life changes. Unless the investor reviews the strategy properly, the portfolio may continue to operate as though the original circumstances still apply.

Confidence Is Not The Same As Financial Strength

Some investors are comfortable taking risk. They may describe themselves as adventurous, accept short-term market falls and prefer higher-growth investments.

That can be suitable for some investors. The issue is that tolerating a high level of risk and having the capacity to take that level of risk are not the same thing.

Tolerance is how an investor feels about risk - will they be consumed with worry when markets fall or accept it as a normal part of investing. Capacity is whether they can cope if the portfolio falls sharply at the wrong time- even if they feel comfortable with market ups and downs, what happens if the investment income they are reliant on has to reduce or if they have limited other assets- their ability to absorb losses may be lower than their tolerance suggests.

This matters because risk is often overlooked when markets are rising. The real test comes when markets fall and the investor still needs the portfolio to support their plans.

A proper risk review should therefore ask more than “how much risk are you willing to take?” It should also ask how much loss could be tolerated, when the money may be needed, and what would happen if markets fell at the wrong point. Of course, neither tolerance nor capacity are binary choices; while some investors will have a high or low tolerance or capacity, most will fall somewhere on a spectrum in between.

Too Little Risk Can Also Damage Outcomes

Risk is often discussed as if the only danger is taking too much. That is not always true.

Taking too little risk can also damage outcomes, particularly for investors with long time horizons who need their money to grow. Holding too much in cash or very cautious investments may feel comfortable, but it may reduce the chance of achieving long-term goals, especially after inflation is considered.

This does not mean cautious investing is wrong. For some investors, protecting capital or reducing volatility may be more important than maximising growth. The key issue is whether the level of risk is deliberate and linked to the objective.

An adventurous investor may need to check that they are not taking unnecessary risk. A cautious investor may need to check that they are not being too cautious to reach the outcome they want.

Both can be wrong if the portfolio is not aligned to the goal.

Efficient investing means taking the level of risk needed to pursue the objective, without taking unnecessary risk that does not improve the chance of reaching it.

Timeframe Changes The Decision

The closer an investor gets to needing the money, the more important risk control becomes.

A market fall is not the same for every investor. Someone investing for 20 years may have time to recover losses. Someone planning to withdraw money next year may not.

This is especially important around retirement. If an investor starts drawing income after a market fall, they may have to sell investments when values are lower. That can make it harder for the remaining portfolio to recover, particularly if withdrawals continue.

A portfolio built for growth may therefore need to change before income is needed. Waiting until withdrawals begin, or until markets fall, can leave fewer options.

This does not mean investors should automatically reduce risk as they get older. Some investors may still need growth in retirement, especially if income is needed for many years. The point is that the risk should be reviewed before the money is needed, not after pressure has already appeared.

Markets Can Change The Risk

An investor does not need to make many changes for their portfolio risk to change.

If shares perform strongly, they may become a larger part of the portfolio. If one region or sector performs especially well, it may start to dominate results. If lower-risk assets lag behind, their share of the portfolio may shrink.

This can leave the investor with a different portfolio from the one originally selected.

That may be acceptable if the investor understands and wants the higher risk. It is a problem if the change has happened unnoticed.

The same applies in reverse. After periods of market uncertainty, some investors move more heavily into cash, money market funds or cautious strategies. That may be suitable for some, but if it is not reviewed, the portfolio may become too cautious for the investor’s long-term objectives.

Risk should not be accidental. It should be reviewed regularly to check whether the portfolio still matches the investor’s current circumstances and future plans.

Returns Are Not The Whole Measure

A portfolio can deliver strong returns and still be taking more risk than necessary. It can also deliver modest returns and still be suitable if the objective was capital preservation or lower volatility.

This is why returns alone are not enough.

Investors should ask whether the return was achieved efficiently. Did the portfolio take more risk than needed? Was it too dependent on one market? Did it expose the investor to losses they could not afford? Did it support the outcome the investor actually wanted?

A high return is not automatically a sign of good planning. A low return is not automatically a sign of failure. The important question is whether the portfolio is doing the right job for the investor.

This is where self-investors can find it difficult. It is easier to compare fund returns than to judge whether the whole portfolio is correctly aligned to a financial goal. But it is the second question that often matters more.

Warning Signs Your Risk May Be Wrong

Investors should consider a review if any of the following apply:

• The portfolio was built several years ago and has not been reviewed properly since.
• Retirement, income withdrawals or a major expense are now closer than when the portfolio was first selected.
• The portfolio has grown significantly, making future losses more financially meaningful.
• The investor is unsure how much of the portfolio is exposed to shares, bonds, cash or one specific market.
• The portfolio has performed well, but the investor does not know whether the level of risk has increased.
• The investor has moved heavily into cash or cautious funds after market uncertainty, without a clear long-term plan.
• The investor cannot clearly explain what each part of the portfolio is meant to do.

These warning signs do not automatically mean the portfolio is unsuitable. They do suggest that the investor should not rely only on past returns or old assumptions.

What A Proper Risk Review Should Ask

A useful risk review should go beyond broad labels such as cautious, balanced or adventurous. Those labels can help, but they do not provide enough detail on their own.

These questions are hard to answer from a platform statement alone. A statement may show performance and value, but it will not always show whether the current risk level still fits the investor’s life and objectives.

Why Planning Matters

Financial planning is not about removing risk. It is about making sure risk is being used properly.

A planned portfolio starts with the outcome the investor wants, then builds the investment strategy around that outcome. It considers how much growth is needed, how much risk is acceptable, when money may be needed, how tax allowances can be used and how the portfolio should be reviewed over time.

This is different from simply holding funds that have performed well.

A fund can be strong but unnecessary. A portfolio can be high-performing but unsuitable. A risk level can be comfortable today but inappropriate in five years.

The FCA’s Financial Lives 2024 survey found that only 8.6% of UK adults had received regulated financial advice about investments, pensions or retirement planning in the previous 12 months. That means many investors are making long-term decisions without regulated advice.

This does not mean every self-investor needs advice. It does mean investors should be honest about whether their current portfolio is being managed against a clear plan, or simply adjusted around recent performance, habit and market conditions.

Book A No Obligation Call

Investors who manage their own portfolio may know what funds they hold, but still be unsure whether the overall risk is right for their current circumstances.

A no obligation call with one of our advisers can help investors understand whether their current approach is still aligned with their objectives, time horizon and attitude to risk. It can also explain how a more structured financial planning process could connect investments to specific outcomes, such as retirement income, long-term growth, capital preservation or passing wealth to family.

The call is designed to help investors make a more informed decision about whether professional advice may be appropriate. Any personal recommendation would only be made after understanding the investor’s financial position, objectives, time horizon and attitude to risk, and would include a clear explanation of risks, costs and ongoing service.

Summary

Investment risk changes over time. It changes as markets move, as portfolios grow, as life stages change and as the purpose of the money becomes clearer.

Self-investors can manage this well, but only if risk is reviewed properly. A portfolio that was right at one stage of life may not be right at another. A risk level that felt comfortable when the money was not needed may be less suitable when income, withdrawals or capital protection become more important.

The key question is not whether a portfolio has performed well recently. It is whether the portfolio is still suitable for the outcome the investor wants to achieve.

Efficient investing means taking enough risk to pursue the objective, but not unnecessary risk that could undermine it.

For investors who are unsure whether their current portfolio still matches their circumstances, a no obligation call can be a useful starting point.

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