Risk Forecasting Is A Risky Business

When you meet with a financial adviser to discuss any potential long-term investment (including pensions) their first step will be to gather details of your personal and financial circumstances. They will then assess your risk profile taking account of your objectives, attitudes to risk and capacity for loss.

Advisers will often use a risk profiling tool to obtain a risk measurement. If used appropriately this tool delivers a baseline upon which to base decisions and a level of consistency in the advice offered.

Risk forecasting tools are often criticised. They are software products and therefore the quality of their output is directly related to the quality of the input. They also use a number of assumptions that may or may not be valid. It is important your adviser understands both something of the computation and the assumptions made.

Nobody can be certain what will happen in the future. All that can be done during a pre-retirement planning exercise is to make a well- judged assessment based on your profile and objectives, long term experience and the (historic) data available at the time.

A consistent process based on inputs from various tools can ensure consistency and give the best chance of success but there are no guarantees. Relying on risk forecasting and/or automated investment recommendations alone remains a risky business.


This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are correct at the date of publication.

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