Yet, how do you assess your attitude towards this risk?

Many times investors are asked to define their attitude to risk without knowing how much capital they need in low risk investments to protect themselves against risk or, what type of risk they can cope with.

Are you conservative, aggressive or realistic?

You may even be asked to select from a number of portfolios with different ranges of returns and losses?

Many investors will state that they are conservative, primarily because they do not want all their investments in the stock market and, they do not want to be exposed to the risks this can bring.

In fact, this is not a conservative attitude, it is a realistic attitude. 

TAMRIS recommends that advisors illustrate the level of security a portfolio provides against periods of significant stock market and economic risk.

This type of analysis allows individual investors to determine if the level of security recommended is enough to allay their aversion to significant stock market and economic risk.

For example, an investor who considers themselves conservative and under a normal risk assessment would ask for 50% of their assets to be placed in low risk investments.

However, if we were to do an analysis on how much low risk assets would need to be in the portfolio, as a minimum to protect the investor against significant stock market and economic risk, we might find that 56% needed to be in lower risk assets. The investor who thought he or she was conservative is actually being realistic.

Where this allocation is insufficient to allay worries over stock market risk, the investor could therefore go to progressively more conservative portfolios. 

But investors should note that by indicating a higher level of stock market risk aversion they may possibly be a) accepting a higher level of inflationary risk, b) limiting the ability of assets to provide future income and capital growth.

There are many ways of assessing this risk. The way in which it is assessed is dependent on the wealth manager's investment and portfolio construction, planning and management disciplines.  Part of the TAMRIS service is to assess whether or not an organisation's management of this risk is appropriate.