What your Risk Score means and how it affects your portfolio

Jessica Amodio
Partner and Independent Financial Adviser at GDA

A financial risk score is a numerical representation of the level of risk associated with an investment portfolio, financial product, or even your overall financial situation. It helps you and your adviser understand your potential for loss and how comfortable you are with that potential.

Risk scores are typically calculated by considering various factors and assigning numerical values to them, often using a scale like 1 to 10. Financial advisers use risk assessment tools, such as questionnaires, to gauge their client’s risk tolerance. These assessments translate into a risk score, which can be a number or a descriptive term like "cautious" or "adventurous". An investor with a low risk tolerance might receive a low risk score (e.g., 1-3), indicating a preference for safer investments with lower potential returns. Conversely, an investor with a higher risk tolerance might receive a higher score (e.g., 7-10), indicating a willingness to accept greater volatility for the potential of higher returns. 

The example opposite shows a risk score generated for one of our clients. We are able to share this information with clients and discuss whether they agree or disagree with the assessment. Once the risk score has been agreed, this is used to help tailor investment portfolios to each client’s unique goals and comfort with risk.

By assessing factors like age, income, time horizon, financial goals, and attitude to market ups and downs, advisers are guided as to how a portfolio is built—balancing higher-risk assets like equities with more stable options like bonds or cash. The result is a bespoke portfolio designed to match your specific needs, aiming to grow your wealth while staying within a level of risk you feel comfortable with.

High-risk funds typically invest in assets that have higher potential for growth but also greater chance of short-term ups and downs. These might include equity funds (shares in companies, often global or emerging markets), sector-specific funds (like technology or biotech), or small-cap funds (companies with smaller market value that can grow quickly but are more volatile). These funds aim for higher returns over the long term and suit clients with a longer time horizon and a higher capacity to handle market swings.

Low-risk funds, on the other hand, focus on stability and capital preservation. They often invest in fixed-income assets like government or corporate bonds, money market funds, or defensive multi-asset funds that blend equities with bonds to smooth out returns. While these funds usually deliver lower returns than equities, they help reduce overall portfolio risk and provide a cushion during market downturns.

So whatever your attitude to risk, your financial adviser is able to tailor a bespoke portfolio to meet your needs.

This article is for general information and does not constitute personal financial advice. If you’re unsure what’s best for you, seek independent financial advice.