Managing your risk

Managing your risk

When it comes to your finances, peace of mind can only be achieved once you've confronted both traditional wealth-management risks, and any challenges that are specific to your circumstances.

When it comes to investing, risk and return usually go hand in hand. In general, the higher the return you seek, the more risk you're likely to be exposed to. The investments with the greatest potential to deliver solid, long-term performance may still be the most volatile in the short term as over time, your investments may fall as well as rise. In some cases, you may not even get back the amount you originally invested.

If you have international financial interests, getting to grips with this trade-off is just one part of the process of managing risk. Global investors also need to be aware of issues such as currency risk, and how local market conditions and macro-economic issues could impact their wealth. Understanding your attitude to risk should be your first step.



"Once you understand all the potential risks that can affect all aspects of your finances, you’ll be in a good place to manage them more effectively and make the most of your wealth"

Risk versus return

Your attitude to risk depends first upon your personality; are you someone comfortable with taking risk? Would you be unduly stressed, for example, if one of your investments fell in value, even if you knew it could bounce back in future?


Internationally minded people may be more adventurous in their personal life choices, but this doesn't necessarily mean they are risk takers when it comes to their finances. You may, for example, feel you have already taken enough risks by moving overseas. Therefore, you may not want too much investment risk.

Risk also depends on your investment goals and the time period over which you hope to achieve them. A 35 year old investing long-term for retirement in another country may be comfortable taking more risk than they would be if they were investing for the short term such as paying for their children's education. The longer-term investment would have more time to potentially recover from short-term setbacks.



Relative risk

Different asset classes offer different risk and reward profiles. At one end of the scale, deposit-style savings accounts can preserve the value of your capital (though not necessarily from the effects of inflation) but offer limited returns, particularly in a low interest environment.

By contrast, stock market investments are less predictable and fluctuate over time, but they have the potential to outperform other asset classes over the long term.

A portfolio approach to saving and investing could allow a more balanced and weighted approach to help reach your financial goals.



Diversification in practice

Global investors with investments across a range of asset classes and / or regions, are more able to spread risk and therefore increase their ability to defend against volatility. The idea is that other assets in the portfolio could potentially compensate for those specific assets that perform poorly.

It's important to think carefully about whether the assets used for diversification are sufficiently flexible for your future plans. Your financial adviser or fund manager would be able to help.

For individuals who manage their own investments, staying on top of a diversified portfolio could prove a challenge. For example, it may be difficult to follow any changes in legislation in the country you live in if you do not speak the language. And your distance from other countries in which you may hold assets, including back home, can make it difficult to keep up with these too.

If, as an expat, you diversify, you need to think about the practicalities, which is why seeking professional advice is a great idea, and not just on diversifying; you need to ensure that in the event of an emergency, for example if you fall critically ill, you have all bases covered for you and your family.



Managing currency risk

Currency risk is an issue many expats should take time to consider. This could be when paying a housing deposit or a mortgage, getting income from a rental property, or even sending money to family and friends back home. Good wealth management should take into account all aspects of your life, and being internationally mobile brings additional considerations.

If you have an investment fund worth €10,000 and the exchange rate with the pound is €1.30, it is worth around £7,692. If the exchange rate suddenly rises to €1.40, it is only worth £7,143. In sterling terms, your wealth has fallen by almost £550 simply because of movement in the exchange rate.

You can manage this risk in different ways. First, expats should think about whether it's best to save and invest in the currency they use now and expect to use in the future. For example, if you plan to educate your children in the Eurozone or retire to the UK, saving and investing in sterling and euros will mean you're not at the mercy of fluctuating exchange rates when that time comes.

Another option is to use currency solutions such as fixed-forward agreements. These arrangements are a way to gain certainty about the value of your money transfer in the future, even in volatile currency markets.

You can also pro-actively manage the impact of exchange rate fluctuations with solutions such as flexible forwards and limit orders. A flexible forward allows you to fix the exchange rate for a transfer (or a series of transfers) between two set dates in the future. Limit orders allow you to specify an exchange rate at which you would like to make a transfer over a set period.

There are still risks associated with these currency solutions so it's important to carefully weigh up all the available options and choose the one you feel is right for you.



Coping with local issues

Expats need to pay close attention to any changes in legislation or their tax obligations in the country in which they live. Governments across the world can change the rules very frequently. Across many jurisdictions, the pace of change has increased in recent years, with greater co-operation and far-reaching implications on tax matters.

Before you make any investment decision, you need to think carefully about your attitude to risk, both in traditional ways and specifically in the context of your expat status.

Once you understand all the potential risks that can affect all aspects of your finances, you'll be in a good place to manage them more effectively and make the most of your wealth.

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The value of investments (and any income from them) can fall as well as rise and you may not get back what you invested. For some investments this can also happen as a result of exchange rate fluctuations as shares and funds may have exposure to overseas markets. Investing should be seen as a medium to long-term proposition of at least five years.

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