Risk Warning
Getting to grips with the concept of risk and how it interacts with the investment process is possibly the most important
thing you need to understand if you are thinking about investing. It is a complex subject though with many constituent
parts so can often be difficult to tie down and define.
The purpose of this document is to provide you with an understanding of the different risks that investments are exposed
to. It will go on to illustrate the ways investment managers try to manage those risks as well as explaining the type of
things that you need to consider when deciding on the type of investment which is right for you.
What do we mean by risk?
When it comes to investments, risk is all about the possibility that your investment could fall in value as well as rise.
Everyone looking to make an investment does so in the hope that it will increase in value but in doing so, they must
accept the possibility that they could end up with less money than they started.
All investments carry a certain degree of risk, it is unavoidable and drives the returns that your investment manager hopes
to make.
Risk vs. return
Returns from investment are inextricably linked to risk. The level of returns you can expect to make are dependent on the
level of risk you are willing to accept. In general, the higher the risk, the higher the compensation the investor should
receive in the form of returns, but this is not always the case.
Unfortunately, by taking on more risk the chance of losing money increases as well. The job of an investment manager is
to achieve the optimum level of return for any given level of risk.
So what are the risks?
The range of risks affecting investments is very broad and wide reaching. They can range from high level socio-economic
concerns such as war or political turmoil to more company specific problems like bankruptcy caused by the actions of a
rogue trader.
Below are a few of the key risks the investments we use are likely to be subject to:
 Social/political
Government policy and social issues have wide reaching consequences for the value of investments. Regulation
can stifle industry just as favourable tax breaks can benefit it. Decisions made by politicians as well as public
sentiment, need to be carefully considered when assessing risk.
 Interest risk
The risk that the prevailing interest rates can be detrimental to the value of your investments. A rising interest rate
environment can cause the value of fixed interest investments to fall as the fixed interest rate they offer is no
longer competitive.
 Currency risk
The risk that the value of an investment held in a foreign currency falls as a result of a change in the exchange
rate. The value of shares in an American company held by a UK investor may grow in dollar terms but if the
exchange rates move adversely the sterling value of that investment could fall regardless.
 Inflation Risk
The risk that the real value of your savings will be eroded by inflation. Savings need to keep pace with prevailing
inflation or you will in effect be losing money in real terms. This is often considered the risk of not investing
because if you leave money in a bank account paying interest at a rate below inflation, you are effectively losing
money.
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 Liquidity risk
The risk that the value of an investment cannot be realised quickly because there are insufficient buyers in the
market. This is a problem in a falling market as an investor is unable to sell quickly without accepting a much
reduced price. This risk is more relevant to property investing or with unlisted companies because they do not
have the high volumes of trading activity that FTSE 100 companies might have.
The above are just a few of the risks associated with investing. Some of them can be anticipated and present themselves
with common regularity. Others are completely unpredictable. Unprecedented world events occur all of the time and it is
impossible to predict them.
Managing risk
Although it is not possible to predict what is going to happen, it is possible to manage your exposure to potential
problems. The role of the investment manager is to design portfolios that can withstand shocks from unexpected sources
whilst offering the opportunity for growth.
This process is done through a variety of means from appropriate asset allocation through to ensuring you have adequate
diversification. Risk are manageable because different classes of assets are affected by the risks detailed above to
different degrees.
For example, government debt or corporate bonds are conventionally considered “less risky” than equity because
historically their values do not fluctuate up and down as much. Similarly, large well-established companies are less likely
to go bankrupt than new start-ups and accordingly are considered less risky.
By changing the allocation to different kinds of assets, the risk profile of a portfolio can be adjusted. Striking the right
balance across all these different asset classes is what good investment management is all about.
Risk and the individual
As part of our advisory process we look to assess the level of risk you are willing to tolerate. This is a very important step
and will have a big impact on the kind of recommendations we might make for you.
We will look to agree a risk profile for your investment portfolio and we will then manage your portfolio within the risk
parameters that we agree with you. These parameters can be narrow or they can be a bit wider depending on the level of
discretion you are willing to give us. At Money on Toast, we only work with regulated products and the risk categories
described below are in relation to regulated products. We work to 5 core risk profiles and the below description will give
you an understanding of what each risk category means in plain English.
 Very cautious
You would generally prefer to avoid the volatility of stock market investment and prepared to accept the inflationary
risk that that implies. You want to steer clear of equities and have all of your money in Cash, Gilts and equivalents.
 Cautious
You’d rather have a scenario where, if you make a gain, it is a small gain, because then any losses will likely be
small too. You may not have much investment experience and you are willing to forgo high investment returns for
the relative security this offers. You want high exposure to Cash, Gilts and equivalents and only want limited
exposure to Equities.
 Balanced
You would like to ensure your short term financial security through low risk investments but also wish to benefit
from the long term investment prospects provided by equities. You don’t want your Equity exposure to ever be
excessive.
 Adventurous
You would like some investment in higher risk investments which carry the risk of potential loss of capital but not to
the detriment of either your long term or short term financial security. You are happy to have 100% of your portfolio
in equity at times if market conditions dictate.
 Very adventurous
You are prepared for the possibility of large losses as well as large gains. You would like considerable exposure to
higher risk investments despite the potential loss of capital. You like your investments to incorporate up-andcoming economies.
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Risk and our Managed Portfolio Service
The Managed Portfolio Service is our core investment services. Via the MPS we run a series of different portfolios which
are kept within the defined risk parameters at all times. Each portfolio is run with set risk-focused strategy ranging from
very cautious through to very adventurous as described above.
The level of risk each portfolio is exposed to is designed to be kept constant at all times. This means that we will not
materially change the exposure to risk assets just because they happen to be doing well at a certain point in time.
Through this commitment to fundamentals we can ration the level of risk you, as an investor, are exposed to. If you
decide that your circumstances have changed and you would like to take on more or less risk with your investments, then
you can simply let us know and we will link your holdings to a more or less adventurous strategy. We will not however do
this without your prior consent.
Glossary
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
Equities – stock, share or any other security representing an ownership interest normally in a company.

Volatility – Volatility refers to the frequency and severity with which the market price of an investment fluctuates.
High volatility implies rapid and large upward and downward movements over a relatively short period of time; low
volatility implies much smaller and less frequent changes in value.

Higher risk – higher risk investment may invest in emerging markets, commodity funds such as oil and metals and
even consider derivatives (investing in parts of shares) or high risk hedge funds.
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