The Biggest Risk in Investing: Not Understanding Your Risk Profile, Investment Goals, and the True Meaning of Risk

A Confusing Year for Even the Most Thoughtful Investors

If you’re looking at your investment portfolio and scratching your head, you’re not alone. So far this year, we have seen some of the most market volatility since the COVID-19 pandemic, which has tested even the most well-constructed portfolios. Many of the expats I have spoken to over the last few months were surprised by how exposed they felt. But it wasn't their fault. It’s just that their investments weren't suitable for their needs and were designed to achieve their financial goals.

Some will blame the markets. It's out of their control. They will think the markets are the risk, and their biggest fear then becomes the fear that their accounts fall to zero. In reality, the bigger danger will always be found in a mismatch between your goals, investments, and who you are as a person.

The year is not over, so read on to learn what you can do in the long term to ensure your investments are built with confidence on a strong foundation.

What a Risk Profile Really Is, And Why It Should Come Before Any Investment

If we sent a poll to all expats in the Middle East to understand if they had ever completed a risk profile questionnaire, I think we would be startled how many have never completed one, did one years ago, or just guessed. Even for the most financially astute expat, investing without a proper understanding of your risk profile is like building a house without a blueprint, and just starting to lay bricks on the grass.

That would be wild. You just wouldn't do it. Right…?

It doesn't matter whether you're young or old, have specific goals, or have particular investment preferences; your attitude to risk will always be different from that of your friend or colleague when it comes to planning. When did jumping on the bandwagon or following the crowd last have a positive outcome?

Ok, so let's break it down. What do we need to get to know by calculating our risk profile?

Capacity for loss

Simply put, this is the amount you can afford to lose from your portfolio before it's 'squeaky bum time' or you make a rash decision which will later cost you more. It comes down to financial resilience, because even if someone feels they can take on risk within a portfolio (risk tolerance), it may still be unsuitable if their financial situation cannot withstand a financial setback. For example, if you're a year or two away from retirement or your child’s university education, you may not be able to recover and achieve your goal.

A number of factors come into play when considering your capacity for loss:

• The time horizon for when money is needed

• The size of the investment relative to their total wealth

• Their income sources (and whether they are secure and diversified)

• Their expenditure requirements (both current and future)

• Any other safety nets (pensions, properties, guaranteed incomes, etc.)

The closer to a financial goal you are, the shorter investment horizon you have and the more dependent you are on this investment, the more of a roll of the dice it becomes to be in an investment strategy not in tune with your capacity for loss.

Attitude to Risk

This is the aspect of investment risk that expats may be most familiar with, as it refers to a person's emotional and psychological tolerance for risk, making it much more subjective. It relates to how much fluctuation in the value of your portfolio you are comfortable accepting, known as volatility.

Even an expat who has built an extensive portfolio over their career, if they are uncomfortable with short-term losses, needs to be careful about what they choose to invest in. Whether someone has a tolerance for risk or not comes down to some key factors:

• Past experiences with money and investing

• Current life stage (young professionals often have different feelings from retirees)

• Cultural background (some cultures are more risk-averse than others)

• General personality traits (optimists often tolerate more risk, pessimists less)

In simple terms:

• Capacity for Loss = Can you afford the loss? (financial)

• Attitude to Risk = Can you sleep at night if you lose money? (emotional)

It’s like planning a hike, your gear (capacity for loss), your fitness level (risk tolerance), and your destination (risk need) all matter. If they’re misaligned, you’re asking for trouble. When you get it wrong and these factors don't add up, that's where I see expats making emotional decisions out of fear and misunderstanding to sell out of their portfolio, which will ultimately cost them.

All of this can be easily avoided by building an investment portfolio around them, rather than what everyone else says to do or does.

The True Meaning of Risk, And Why Most People Get It Backwards

Let’s take a step back for a second. Is the risk volatility or a short-term loss? Or is a bigger risk the risk of our failing to achieve our financial goals? Financial worries are amongst the worst.

If we don't select the right investment strategy that matches our risk tolerance (capacity for loss and attitude to risk), then we will either fall short and play it too safe over the long term. Or, we will shoot for the moon, but then get bucked off the horse in moments of market volatility that we are not comfortable with.

Coming back to the present moment in 2025, with markets still mostly down year to date, should we be concerned? The answer for many is no.

Market volatility is entirely normal. In fact, it’s expected. Much like turbulence on an aeroplane, it can feel uncomfortable in the moment, but it doesn’t mean the journey is off course or that we need to change direction mid-flight or scream out demanding an emergency landing.

Let’s look back at what history tells us.

In 2020, when the COVID-19 pandemic hit, the S&P 500 fell sharply, down 34% in just 23 days. That was the fastest drop in modern market history. Yet within five months, markets had recovered completely. Today, the S&P 500 stands around 5,5250. That’s over 130% higher than the 2020 bottom.

Before that, in 2008, we experienced the global financial crisis. The S&P 500 dropped 57% between October 2007 and March 2009, falling from around 1,565 to 676. But by 2013, the market had fully recovered. Since then, it has risen by over 670%. That’s an average return of around 12.5% per year for those who stayed invested.

These weren’t easy times to live through. But they show us something important. Markets don’t reward short-term emotion. They reward long-term discipline.

Having a well-diversified portfolio ensures that you’re not relying on the fortunes of any one market, sector, or company; it spreads risk and provides a much smoother experience over time.

When investors react to fear and step out of the market, they often miss the recovery, during which the most significant gains tend to occur. Missing just a few of the best days can have a lasting impact on long-term returns. The real risk of these decisions is that they cause us to fall short of our long-term goals, leading to long-term regret.

So, while today’s volatility may feel unsettling, it’s part of the process. The current economic environment, interest rate expectations, and global headlines may cause short-term movement, but they do not change the long-term principles of investing.

In fact, periods like these often present buying opportunities for disciplined investors. Volatility shakes out market inefficiencies and sets the stage for future growth. Just a year ago, most major news outlets were promoting the record highs that had been reached. And today, with valuations back to where they were last year, it's all doom and gloom in the media.

For someone retiring in their 60s, there is a greater than 50% chance that they will be alive at age 90. That’s three decades of funding a lifestyle. And so, the real risk then isn’t a drop in the market, it’s realising too late that your money won’t last as long as you do and that your only recourse is to ask your children for support.

So, the strategy remains the same. This is why we build a plan, not just to invest wisely, but to stay invested wisely and ensure that we reduce the risk of going too far off track.

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Three Portfolio Pitfalls That Can Quietly Undermine Your Strategy

One of the most overlooked roles of an independent financial planner is helping their client understand what risk is and finding the happy medium between taking on too much risk and not achieving their goals. As long as we start early, we should have enough time to achieve a realistic goal.

Having said that, from my personal experience and perspective, I do typically see expats falling into one of three common pitfalls. So let’s help you understand where they are and how to navigate safely around them.

Pitfall 1 - Over-concentration in Equities

This one comes from taking others' words around us too literally and then laying the path towards future failure. It’s not a possibility, it’s a certainty.

We have all heard the hype. The S&P 500 returns are unbeatable over the long term. But are they? Let’s simply start by understanding what the S&P 500 is, and what you’re buying when you buy the ETF (exchange-traded fund).

The S&P 500 (Standard & Poor’s 500) is an index that tracks the performance of the 500 largest companies listed on U.S. stock exchanges by market capitalisation, meaning the bigger the company, the greater its influence on the index. Due to the nature of the US economy, it is predominantly driven by the technology sector, and its underlying asset is 100% equity-based.

And this is where some can get it wrong. With the majority of growth in the last decade coming from Quantitative Easing (where a central bank purchases securities in the open market to reduce interest rates, increase the money supply and therefore economic growth), it means the US economy is essentially propped up by artificial money which will have to be paid back at some point in the future.

As a result, when an expat invests in something they don't fully understand, which is highly sector-specific and geographically specific, and without realising it, they take on huge amounts of risk in just one asset class (equities), putting all their eggs in one basket. This is great when markets are all performing well, but when volatility returns and markets correct in a normal and healthy way, those holding undiversified 100% equity investment portfolios have nowhere to hide. For expats who may not have a full understanding of their risk tolerance, it’s understandable why this could lead to financially unhealthy decision-making.

Pitfall 2 - Being Too Cautious for the Timeframe

As we covered earlier, one of the biggest factors that determines your attitude to risk is past experiences with money and investing. If you potentially got something wrong before, as we know, once bitten, twice shy. Anyone would naturally become much more cautious with their investments, perhaps favouring the comfort of cash fixed deposits, government bonds, with limited equity exposure, which could expose them to a different kind of risk.

Not beating inflation over the long term, and not meeting their growth needs to achieve their financial goals.

When you sit down with an independent financial advisor, part of the goal-setting process is understanding what net growth rate you need to achieve to meet your goals. If you don’t hit those rates of return, this creates a hidden risk and a shortfall later on, which is harder to recover from.

Having an appropriate amount of equity in a portfolio is essential for most people. We can reduce the risk and volatility by ensuring that it is globally diversified and spread across all sectors, not just technology

Pitfall 3 - Not planning for inflation

Probably one of the most important parts of creating any tailored financial plan is understanding what your future financial needs will be and what the true cost of them in the future. For example, someone planning for £2,000 per month in retirement based on today’s prices might need £9,000 per month in 20 years, depending on their retirement income needs.

If inflation isn't built into the plan from the start, they will fall behind every month because they won't be saving enough. By that point in your life, most will have two less-than-ideal choices. The first is to retire later, so you can continue saving and investing towards your retirement. The other, if health or circumstance doesn't allow you to keep working, would be to reduce your monthly income and reduce your quality of life.

We also need to consider the impact of inflation on the annual growth we see. If a portfolio grows by 7% in a year, with inflation at 2.5%, it will only grow in real terms by 4.5% annually.

Do you think you might be guilty of making one of these mistakes? If so, book a call with me today so that we can discuss how to get you back on track.

Why 2025 Wasn’t the Problem, But It Revealed the Problem

In reality, the market volatility that we have seen so far in 2025 caught a lot of expats napping. President Trumps Executive Order’s announcments on day of his second inauguration definitely pointed to a ruffling of the feathers in global trade and energy, and had the air of inflation about them.

However, in reality, the ripples that followed exposed many “off the shelf” and passive portfolios, that were geared largely towards the US. What failed wasnt the market, it was the lack of alignment between an strategy and individual investment profile. Clients who didn’t know their risk profile or had misjudged diversification felt the pain more than they should have.

Market cycles last on average between 7 to 10 years, so we should expect regular market turbulence. But if we aren’t ready for it, approaching a significant goal, or investing without real though then we must be ready for the consequences, and thats were portfolio panic sets in. Typically, as a result of misalignment rather than bad luck.

A poorly fitted investment plan doesn’t reveal itself in the good years. It breaks down under pressure, just when you need it to hold together.

What Diversification Really Means, And What It Definitely Isn’t

Diversification is, for most people, a known phrase but often used without understanding its true meaning. Diversification is not about quantity of funds, its about correlation. There is no value to be found in holding multiple funds that all track and hold the same markets or asset classes.

Owning 10 ETF that all track US Technology, only works when markets are trending upwards and can leave expats with whiplash in years such as this. It’s not about how many flags you have, it’s about whether those flags are going to move in the same direction when the wind changes.

Real diversification spreads risk across:

• Asset classes: cash, cash alternatives, bonds, equities and alternatives

• Sectors: Technology, healthcare, energy, financials, commodities, property

• Geographies: US, Europe, UK, Emerging Markets

• Time horizons: short, medium and long term horizons

• Management styles: combining passive (ETFs) with active management

Diversification is like designing a house with multiple exits. If the kitchen catches fire, you don’t want all your doors to be in that room

Why Time Horizon is Often Misunderstood, and Why That Matters More Than You Think

Aside from investing towards building a deposit for a property, rarely do our financial goals require us to completely sell out of our investments. As with retirement and children’s university planning, our investment time horizons do not end there and that is not the finish line, its just the start of another phase of your life. Turning 60 or 65 at the start of retirement, we arent going to sell out of our investment and hold everything in cash for the next 20-30 years, we reallocate based on cash flow needs, withdrawal strategies, and inflation protection.

Yet, we dont want to be taking on as much risk as we did in our earlier years. So how do we adjust our investment profile to match our financial planning?

Be aware of your investment time horizons. Let’s break down a stereotypical retirement journey for someone looking to retire at some pint in their 60s with some age-based examples:

• 30s: Time is your biggest asset. Equity-focused portfolios are appropriate if profiled correctly.

• 40s: Prime accumulation years. Balance contributions, equity growth, and early goal clarity.

• 50s: Strategy shift begins. Don’t de-risk too early; growth still matters.

• 60s: Transition phase. Prepare portfolios to support income without stopping growth.

• Retirement: Plan for liquidity and longevity. Income layering, risk management, and inflation resistance remain essential.

We don’t sell everything and hold cash when we retire. We adjust, we don’t exit. A qualified adviser helps you think beyond retirement. They help layer your strategy to match near-term liquidity, medium-term income, and long-term growth, even in your 70s and beyond.”

A good adviser helps you structure layers within your portfolio, so your short-term needs are met, while long-term capital continues working.

How to Realign Your Risk Portfolio Around You

It can be easy to get lost in the amount of choice we have as expats when it comes to investing, or hard to see the wood for the trees. But it really doesnt have to be rocket science if we follow some simple steps.

Set inflation-adjusted goals

Discuss with your advisor what your goals truly are. These goals have to be realistic to the best that we know now. Use real numbers and realistic assumptions about what you will need. If our future income needs, the value of our property or the amount of money we want to provide our children for university changes along the way, you can bring this up with your advisor at a regular review meeting.

As an expat in the Middle East, its also important to think about what your net income needs to be. Just because you’re not paying tax now, doesnt mean that you wont in the future.

If you would like to read more about the biggest mistakes expats can make when repatriating home to the UK, click here.

Assess with your risk profile

This is done with your financial advisor, and helps you to understand your capacity for loss, risk tolerance and your need for growth to achieve your goals above inflation. Remember that guessing your risk profile may have been one of the reasons we are where we are, so a calculated approach going forwards is there for your protection.

Understand which funds you are currently invested into

Some of your funds may be perfectly aligned with your financial goals, so there’s no need to wipe the slate clean and start again if something it going well.

Sit down at a table with the statements of all your investments so that you can see the bigger picture. Often, you will find that some of your cash interest rates are not quite as high as you thought they were, or that your UK pension is still invested into the default funds the scheme picked for you years ago. Default doesnt mean bad, just average and certainly not tailored for your needs.

Build or adjust your portfolio

Often consolidating your wealth into an account that offers the most amount of future tax-efficiency and investment options to diversify your portfolio can be a logical first step. Different financial institutions charge different fees for the same or similar funds, which can lead to separate portfolios being directly correlated and therefore not diversified.

Once you have consolidated your relevant wealth, you can consider your needs for future cash flow, access and investment needs. Then staying diversified and aligned with your future, not just your present. A small tweak can make a big difference over the long run.

You don’t need to gamble. You need a roadmap that reflects you, not someone else’s assumptions.

The Real Risk is Not Knowing What You’re Risking

Most of the expats that I meet on a regular basis aren’t reckless, they are just operating without a clear map and calculated end goal. Financial planning is not something that we should be making assumptions about, or hoping for the best.

Clarity is the most underrated investment, because without it, even the best portfolio won’t feel right.

Now that you understand risk a little better, you should be better prepared to make confident decisions to ensure that you get back on track and stay on track. A corrective course change can often allow you to achieve financial freedom earlier than originally planned.

If you’re unsure whether your investments match your goals, your risk profile, or your time horizon, let’s talk.

Book a discovery call and take the first step toward confidence and control. We’ll walk through your goals and risk profile, and I’ll help you find the clarity you’ve been missing.