So, what do you need to know about Investment Risk?
As a firm of Independent Financial Advisers, we always discuss at some length your Attitude to Investment Risk and in particular, the relationship between risk and reward and time. The more risk you are prepared to accept; the greater the long-term rewards will often be, but there is no guarantee of that of course, you could lose money. It is important to maximise your return, but also ensure you are not exposed to a level of risk that is unacceptable to you. It is therefore imperative that your attitude to risk and maximum capacity for loss is clearly defined from the start of the process.
We will ask you to complete a Risk Profiling Questionnaire. The questionnaire has been designed to assess your knowledge, experience, attitude towards investment risk and capacity for loss. The risk scale is made up of 10 profiles overall and your risk profile is important to the type of investments you should consider.
It is hoped that higher-risk investments such as shares give higher returns over the long term, but the investments also fluctuate more (go up and down in value). This means that while people might make more money in the long term with higher-risk investments, they are more likely to lose money in the short term. There is no guarantee of higher returns and you could lose more than you invest.
How you can reduce the Investment Risk?
Time is an important factor when considering risk and risk reduction. Your investment portfolio is the foundation of your long-term income and wealth along with any pensions you might have. You should not usually invest in shares if you will need the money in less than five years.
The main tool used to mitigate risk is diversification, or ‘not putting all your eggs in one basket’. Asset allocation is the process used to diversify an investment portfolio using the following ‘asset classes’:-
- Equities (Company Shares)
- Bonds or Fixed Interest (Loans to Companies or Governments)
- Property (usually Commercial)
Let’s look at asset allocation
Asset allocation is based on the idea that the best-performing investment is not necessarily the same every year. It is impossible to predict which asset will perform best in a given period. Therefore, it is a high-risk strategy to try to predict the “best” asset, however appealing it might appear. Someone who regularly switches from one asset to another generally ends up with worse results than an investor who follows a considered strategy. Costs of transactions have a negative impact.
The basis of the asset allocation concept is the notion that different asset classes offer returns that are not perfectly correlated (that is their characteristics are different); hence diversification reduces the overall risk in terms of the variability of returns. Therefore, having a tailored mixture of asset classes is more likely to meet the investor’s wishes in terms of the amount of risk and possible returns.
An over-reliance on ‘star’ managers can be detrimental – how do you spot the stars in advance? There are some fund managers who do deliver added value consistently and it can make sense to invest part of a portfolio in proven quality funds.
Traditional asset allocation makes use of equities, fixed interest, property and cash. There are alternative assets that can be usefully engaged to add value and, in many cases, reduce risk. Professional fund management houses have the resources available to conduct research and analysis into individual propositions. Your risk profile will guide the investment process in terms of asset allocation within the various portfolios.
What is the best asset allocation for me?
The ‘correct’ asset allocation for you is important. It has been shown over the years that most of a portfolio’s total return comes from asset allocation – as opposed to individual stock selection. There is no way of selecting exactly the right mix for any investor but the general concept holds firm. Assets do not always perform in the way expected, good quality companies can fall out of favour on the markets for no foreseen reason. When worldwide markets fall, they often do so together, with 24 hours dealing throughout the world, markets are always open – somewhere. This means that falls happen quickly, so getting the timing right is near impossible.
How Anstee & Co can help you with your Investment Risk
We are a firm of Independent Financial Advisers (IFA’s). This means that the financial advice we give is unbiased. We will look at all the financial solutions for you from the “whole of market”. So, why not arrange a meeting with us today to see if you are taking the right level of risk need to achieve your financial goals. The initial “getting to know you” meeting is at our cost.
London. Pall Mall, Greater London
Additionally, our financial planners live and make use of meeting rooms in
Market Harborough, Leicestershire
Northampton, Towcester, Wellingborough and Brackley in Northamptonshire.
The information contained in this article is for information purposes only and does not constitute advice. No action should be taken on this information alone.