Independent financial advisers have a series of standardised and FCA-approved questions to establish an individual's risk appetite. From ultra-cautious, then medium, through to a willingness to accept the highest level of risk, clients are profiled. We do the same for four types, suggesting where they invest and why.
First on the list: the chaotic ditherer. Not especially interested in money (until there is none) or doing the homework, he or she likes to keep their options open to such a point that they are often to be found in relatively expensive private rented accommodation in their mid-30s and 40s. Their default choice is cash. Not such a bad idea when high interest rates compounded quickly. Today, the universal lament is that central bank policy has crushed the incentive to save. But real interest rates, where we plot the Bank of England's base rate minus the retail price index, shows just how punitive this method of storing money has been over the short, medium and long term.
UK base rate vs RPI
Next up: the chronically cautious. Correctly sniffing suspiciously at all and any alternatives, they revert to caveman thinking and opt for residential property. Endlessly waving the 'safe as houses' flag, they pat themselves on the back for their astute choice of building, location and timing of purchase. Favouring the 'bigger is better' mantra, likewise with the saloon car outside, they like to think of themselves as good investors and good family men or women. Should the market stumble, they reconcile reality by focusing on the importance of stability and a roof over their head.
UK Nationwide house prices
The strategic planner: reads up, including magazines like this one, has the cash, the home, the car, and says, what next? Bites the bullet with bonds. Regular risk-free income to plump up the salary seems a great idea. Recently many have been dragged in because of rock-bottom rates on cash. Be careful, though: a bond is not a bank deposit that is segregated and operated on a custodial basis. Some Spaniards and Italians who were sold these by their friendly local banker have now found out. A bond is just an IOU where you may or may not get your money back. High yield offers higher returns for a reason; it's called default.
Ten-year gilt yield
The risk-taker: AKA the Kamikaze Kid. Willing to consider anything and everything, especially if it comes with a good (fairy) story with which to impress his mates (it is invariably a bloke) with his knowledge and foresight. Even better if it is the company 'du jour' and has tax breaks. Throw in a bit of glamour and you can see why investing in the film industry has been so popular with UK high-net-worths. The risk with this strategy is overdiversification. Then add in over-optimism, hard-selling so-called advisers, and you can imagine how quickly all might unravel.
There are lessons to be learned from each type.
FTSE All-Share index
