The suitability of an investment for a particular person is at the very heart of the investment process. This concept is a fundamental one, both from a legal perspective and in terms of putting an investor’s money to work both sensibly and prudently. When money is invested unsuitably, there is a high probability of unacceptable losses (or conversely, very low returns) and considerable distress for the investor.

So what exactly is a suitable investment?

The concept means that an investment is appropriate in terms of an investor’s willingness and ability (personal circumstances) to take on a certain level of risk. It is essential that both these criteria be met. If an investment is to be suitable, it is not enough to believe that an investor is risk friendly. He or she must also be in a financial position to take certain chances. It is also necessary to understand the nature of the risks and the possible consequences. According to law, a broker must have a reasonable basis for believing that an investment meets a client’s needs and objectives.

Unfortunately, suitability is not always entirely clear cut. While there can be no doubt that even a risk-friendly investor should not put 100% of his or her total assets into the stock market, when the percentage drops to, say, 60% or lower, the issue becomes less clear. If an investor owns some property and has a conservative pension plan, the 80% and 60% figures take on a different perspective compared to someone with no other assets. Considering your age and other aspects of your personal and financial situation is also crucial.

Suitability largely boils down to asset allocation. Both the law and good investment practice prohibit anybody being advised into an asset allocation that does not make sense for that particular person at that particular time. An investor’s portfolio should be appropriately diversified so as to generate a reasonable level of returns at a sensible level of risk.