Low risk, high return is the Holy Grail, and just as elusive
Written by Lynda Calver on September 06, 2015.
Balancing risk and return is the eternal dilemma faced by all investors. An investment which is low risk but offers a high return is the Holy Grail and remains equally as elusive as the famous Christian relic, however hard a sales pitch you are getting to convince you otherwise.
That old maxim ‘if it’s too good to be true, it probably is’ is never more apt than when talking about investments. There are still those working within the financial industry whose reputations are less than glowing white and this is particularly the case in Asia, which lags behind Europe in cleaning up its act. Those hard-to-believe promises of guaranteed return are sure to be unattainable, however silver the tongue of the person selling them to you.
I know that because it is just not possible to provide a guaranteed fixed rate of return above the rate of interest without risk. The risk may not be obvious but it will be hidden in there somewhere perhaps in the form of long term illiquidity or currency risk. It generally rings true that the higher the return, the higher the risk you will be taking with your money.
Hence the tricky conundrum faced by investors, arguably even more tricky since the global financial crisis hit in 2007: how best to invest? Generally bank deposits are considered to be the lowest risk method but interest on those has been paltry for years now and in some cases, yes we’re talking about you Cyprus, the investments have not been as safe as investors hoped.
Stocks and shares lost favour after 2007 as the financial crisis hit the entire world’s financial markets and now China’s Black Tuesday has reminded investors just how volatile the markets can be with $1 trillion wiped off the value of stocks worldwide overnight earlier this week. All just a short time after record gains were being fêted. Lots of risk there then, whatever anyone tells you.
So if you can’t avoid risk when investing, how can you manage it? The first step is to be very clear on what your own attitude to risk is. Some of us can stomach it but most of us favour the slow but steady approach. The amount of risk you can afford will also be dictated to a degree by your age and your financial goals. If you are young, you have more time to play with and can afford to chase bigger gains by upping the risk ante. If you are closer to retirement, you would be a fool to risk everything with so little time to make up for any losses and are better off playing it safe. A professional financial adviser can help you get to grips with your own personal appetite for risk.
Once you have established your tolerance to risk, you can tailor your investments to fit it. However risky you want to be though, diversification is the key. By diversifying your assets you will be splitting your eggs between various baskets so to speak, so that if one basket breaks, the eggs in the others remain intact.
There are sophisticated products on the market which can do the hard work in diversifying for you. One example is a multi-asset portfolio or MAP which can be adjusted to match your risk profile. A well-managed MAP fund should hold investments in a number of different asset classes such as property, commodities and bonds in addition to equities. They should also contain hedge funds to protect against downside risk in volatile markets such as we have seen recently.
If you would like to find out more about MAP funds and how they can balance risk and returns then please get in touch.