Risk appetite

Risk appetite has been a central consideration in developing my overall asset allocation.

I define risk appetite as a broad collection of rules or parameters which look to define the degree of risk i'm prepared to take in order to achieve an acceptable return.

A common example of risk appetite is the target percentages often quoted for asset allocation, for example 60% equities, 30% bonds, 10% cash.   This is very much a personal decision, although it is widely accepted that the time horizon for investment should play a large role in making this decision.

In my case, i am very risk averse, and have traditionally only had a small proportion of my assets in equities. I did however find it a lot easier investing in property, which has proved a successful asset class for me in bridging the gap between cash & equities along the spectrum of risk.

My aim for the past year has been to target an overall asset allocation of 80% 'invested', and 20% in cash or near cash.   The invested component currently consists of rental property, equities based pension funds and my ETF based investment portfolio.   However, due to a combination of investment paralysis after the recent rally, and a few large cash inflows, i'm currently closer to 65% invested, 35% cash.

In the past i wouldn't have been concerned at all about this, but after having determined an asset allocation that i am comfortable with from a risk perspective, i do feel that i should be looking to move towards my target allocation, and i'm actively looking for opportunities to re-balance and reduce cash.

Whilst i have developed a high level target asset allocation, i have not yet given as much thought to the asset mix i would like to target within the invested component of my assets, other than maintaining a high level of diversification and maintaining a large proportion of my assets in property.

I think developing a clearer long term investment strategy would help to reduce my focus on short term market fluctuations, and get me back to making longer term investment decisions.

This is now next on my to do list!