Why do the risk ratings depend on the investment term?

The term is an important factor in risk rating, which was recognised by the FSA in their guidance in 2011, which is still in force today.

“Investment objectives should be clearly detailed. This could take into account term and appropriate asset allocations for the client’s objective(s).”

The investment term is of paramount importance when constructing a portfolio since the timescale associated with a given investment objective is fundamental in determining the most suitable asset classes for an individual’s portfolio. For example, while the return on cash may have little or no variation in the short term, it can vary more dramatically over longer periods as a result of changes in interest rates. Investors should therefore be assigned a portfolio based both on their risk profile and their potential investment timescales.

Our risk ratings take into account term in 2 ways:

  • Each asset class forecast varies both in terms of risk and returns over time as the model is built on progressively changing yield curves
  • The standard benchmarks vary by the term which allows the clients to retain the risk profile but simply invest according to their objective’s term.