Methodology

Investing Basics

Module 3

What is unsystematic risk?

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Changing Circumstances

Changing Circumstances

After establishing and implementing objectives and an investment strategy, it is necessary to undertake a review periodically, monitoring whether the approach is still fit for purpose or not. If circumstances change, a new plan may be needed. 

 

Circumstance can change for a number of reasons, with significant life events being a key reason for most people (i.e. having a child). These life events can make people more or less aggressive with their approach to investing. Some people may start out by wanting to grow their savings as much as possible, before having a child and wanting to focus more on improving their income to meet the costs associated with having a baby. Likewise, others may feel that they need to be even more aggressive with their approach to investing, in order to build wealth to secure the financial future of their child.

 

Whatever life events come your way, it is important to consider how they will impact your financial situation and whether your current approach to investing is suitable or not.

Changing attitudes towards risk

As well as encountering certain life events, it can also be the case that an individual’s risk tolerance changes over time. This can happen due to changes that happen on an individual level. For example, the more experienced that a person becomes with investing, the less willing they usually are to take big risks.

 

This is a common relationship in finance, where the more knowledgeable someone becomes, the less risk they are willing to take on. This obviously means that a very aggressive approach to investing would no longer be suitable and should be changed. At the same time, if someone starts investing with a lot of fear, investing in very low-risk assets only, their increased knowledge may encourage them to take on more risk.

 

Changing attitudes towards risk can occur due to external events too. For instance, if there is a global financial crisis, it may encourage an investor to take on more or less risk. To further illustrate this point, if an investor feels that the market will crash soon, they may decide to hold more of their money in cash. This would then allow them to invest at very low prices, should a financial crash happen.

Changing circumstances and age

As people get older, their circumstances change dramatically.  Older people may have a desire to retire early and therefore may want to take on slightly more risk in their investments to make that happen.

 

Equally, older people may worry about not having enough income during their retirement and may change their investments to focus on increasing their income. Those perspectives are quite different to younger people, who typically only focus on becoming as rich as possible, as quickly as they can. An aggressive approach is usually attractive to young people, who want to grow their savings to buy a house or to live a more comfortable life. This aggressive approach is likely to change as they encounter significant life events or factors that change their attitudes towards risk.

 

Being able to adapt your investment plan to fit your current situation is important to ensure that your investments are meeting your objectives. It is necessary to review your current investment plans immediately when something happens to change your circumstances.

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