8. Failing to properly understand risk in your finances and your life

It is said (by Lawyers) that Lawyers are naturally risk averse. This is actually true of the majority of the population, particularly once you get outside your comfort zone.

When it comes to financial planning and investment you have to delve deeper, to consider many risks, some you will have thought of, others you may not.


What’s your attitude to risk?

When thinking about your finances holistically, some introspection is in order. There are a number of Psychometric tests available to assess one’s attitude to risk, usually boiling down to around twenty questions about how would you feel if you had a big financial win; how would you feel if your investment dropped 25% and the like. These are crude by nature and the output will be something like a score of 1 – 5 which follows a normal distribution, so most people fall in the middle. But is that really insightful?

Should you think about risk in the same way for every investment? For example:

  • If you wisely have a cash emergency fund, you are thinking about counter-party risk (is the money super safe?) and liquidity risk (will the funds be available when I really need them?);
  • If you are saving to buy a home, you may be building a substantial pot of cash that you will need in the next 12 – 18 months. Do you want all that cash in one place? What is the impact of inflation on your savings?
  • If you are considering investments for your pension in retirement say 20+ years away, how much will you risk running out? Have you considered the sequencing risk of certain investments as that retirement approaches?

What about non-investment risks?

Comfort levels with various risks are driven by emotions and highly individualised. As humans, we tend to be bad at correctly identifying and managing each individual risk; as a lawyer, you may take a strong cautionary approach when identifying the risk running through your clients’ organisations because that is what they pay you to do. This can blur the lines between your personal risk tolerance and your professional risk tolerance, which are not nearly the same thing.

Achieving self-awareness in this area could involve introspection, or it could involve the guiding hand of an experienced finance professional. Be sure to work with an adviser who unpacks risk and discusses all of the risks that your family faces to help you gain absolute clarity around the risks you have thought of and those you may not have.


What assets or asset classes should you invest in?

This is really a case of “it depends”.

  1. What goal or objective is an investment addressing and over what time frame?
  2. When considering your whole financial plan, are all of the basics covered off?
  3. What risks do we see for this investment and are we mitigating them, protecting against a bad outcome or embracing them?

Given your career success, you inevitably will be tempted by investment opportunities that do not stack up against one or more of the above criteria. As enticing as a GameStop-style public short may be, you’ll get better results if you stick to your plan.


Adrian Johnson