How much risk should you take when investing?
Written by Duncan Taylor on July 05, 2018.
Risk is an unavoidable consequence of investing and a financial adviser who promises otherwise is lying. And if you can’t trust them on that simple point, can you trust them at all? An ethical adviser would never give you false promises about risk-free investments because the simple truth is that they don’t exist although of course, certain investments are less precarious than others.
Risk and reward have a tendency to go hand in hand and generating greater than average returns will always require upping the risk ante. No-one knows this better than the man generally considered to be the greatest investor of all time: Warren Buffet. His company Berkshire Hathaway has generated average returns of 20% over the last 50 years or so. That sounds amazing and it is, but what the long-term average figure masks is the short term volatility those stocks have experienced. After the global financial crisis Berkshire Hathaway stocks dropped 31.8% and that wasn’t even their most dramatic nosedive, which was an astounding 48.7% plummet in 1974.
Sometimes investors have to hold their nerve through the short term losses to make long-term gains but such a volatile approach is not for everyone. So how do you work out the level of risk that is suited to you?
Suitability is relevant to all elements of our lives. A surfer doesn’t take to his board dressed in a three-piece suit. Indeed, he may be putting himself in danger if he were to do so. Just as unsuitable attire brings unnecessary risk into the equation, unsuitable investments could put your future financial security at risk. However, working out what investments are right for you is not quite as easy as a surfer grabbing his board shorts and rash guard and taking to the waves.
There are a number of factors to consider in this decision-making process. The first step is to work out what you are trying to accomplish with your investments. For many of us that will be a sufficiently large retirement pot to afford us the lifestyle we desire when we stop working. Other common goals include funding a university education for our kids and saving a deposit for a house but yours might be something completely different such as buying a supercar or a cellar full of fine wine.
Once you know what you want to achieve you can work out the level of risk you require to reach your goals. There is little point in investing aggressively and taking on high risk if a ‘slow and steady wins the race’ strategy will enable you to reach your goals. On the other hand a low level of risk might not be compatible with achieving your financial goals. Sometimes compromises have to be made.
A good financial adviser will take the time to ascertain with you what your risk profile is and here at Infinity, we take the ‘fact find’ process with new clients extremely seriously. Our consultants use a sophisticated risk profiling tool to establish our clients’ tolerance to risk and ensure that they have a clear understanding of the impact volatility has on a portfolio and its potential returns. They also use visual examples to unambiguously illustrate the relationship between risk and reward. The result is a comprehensive assessment of a client’s attitude and tolerance to risk and volatility which can be used to create a roadmap to achieve their financial goals.
If you are an expat in Asia and want to make sure that your investments are in line with your tolerance to risk our advisers have a wealth of experience in assessing the needs of clients, weighing up the pros and cons of different investment strategies and finding the one that is right for each individual.