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When we look at investment options for our clients, we use a range of investment suitability tools to determine the level of investment risk each individual client is willing to take, for example we complete a Risk Questionnaire. However, in my opinion, one of the most important pieces of information when deciding on the level of risk you are willing to take with your money is your investment time frame, i.e. how long can you leave your money invested? No matter what result you get on the Risk Questionnaire, the fund recommendation made will depend on whether you advise that this money will be used to purchase a new car in two years’ time or if you wish to save it for your retirement, which probably means you will not access it until at least age 60.

On the stock market the VIX measures the volatility and in 2022, the VIX spent 91% of trading days about 20.0 which means that there was a high degree of market volatility. A VIX below 12 is considered low and a VIX between 12 and 20 is considered normal. In 2022 the S&P 500 lost 19.4% and just five trading sessions accounted for more than 95% of its losses.

For short term investors this would be a very dangerous place to be invested. On the other hand, if you make a single premium investment into your pension and you are unable to access your benefits for at least 25 years, stock market volatility is not as big a worry as you have time to remain invested in the stock market to benefit from the rebound and the expected higher long-term performance. A sharp fall in the value of a long-term investment will not have a negative effect if you have many years to recover from these losses.

As a general rule of thumb, short term investments are investments in which you need to access the money within a five year period. With these investments we do not advise that you take a lot of risk, and it is in your best interests to look at deposit accounts or low to medium risk investment options that will not suffer from sharp falls in value during periods of high stock market volatility.

Intermediate term investments are invested for a period of five to seven years. Some exposure to the stock market can help an investment with this time horizon grow; however, it is recommended that you only place a portion of your investment in a high-risk option. For this time frame you would benefit from a diversified portfolio of investment funds to help protect your investment from any large falls which you may not have the time to recover from.

Long term investments are investments where you do not need to access your money for at least 10 years. As mentioned above, investments like these include long term pension contracts or savings policies for your children’s education. Investing in the stock market offers greater potential rewards and if you can invest your money for a long period of time you have the opportunity to recover from large falls in value. Although past performance is not a reliable guide to future performance, the stock market always outperforms other asset classes when looking at returns over a longer period of time. It is important to note that as you draw closer to requiring access to the money it is vital to review your investment choices and move to lower risk investment fund options.

Marie Carr, CFP^® MSc BBS QFA RPA SIA is a CERTIFIED FINANCIAL PLANNER. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on marie@jfl.ie