One of our key roles when advising clients and also managing their investments, is ensuring that the risk they are exposed to is appropriate to their financial objectives. Often this is seen as reducing the risk as much as possible, however, this is not strictly true.
Risk has a very clear relationship with return and it is seen on every Key Investor Information Document, a measure of the level of expected risk with that fund and how this may affect the potential returns. This relationship is rather like railway tracks, in that they run in parallel. Therefore, taking too little risk may mean that you do not achieve the returns needed over the long-term.
When looking at short term volatility, this can often lead to heightened concern as to where the market is going, and whether the need is to change the risk being taken. However, our role is to make sure that decisions are made on clear fundamental base and not emotions. The latter can often lead to selling when the market is low and buying when it is high. In fact, history has shown that some of the best days in the market follow shortly after falls.
The other aspect to understand is that there is more than one risk to consider.
The most evident is that of market risk, which has been more prevalent in the past year. This is where the market reflects news on economic factors and international events or change in fiscal or monetary policy. In this case, the pandemic has created an economic slowdown. It is not due to any individual company failing, though they may be affected by the change occurring. We believe by holding a diverse portfolio of high quality investments over the long term, and actively managing them, we work through such risk and still offer the potential for return.
When it comes to specific risk, there are times when a share you are holding is affected individually. These are sometimes not predicted, and so by holding a diversified portfolio, and not more than a small percentage in a single equity, we limit the volatility and impact of this risk.
The other worth mentioning is that of inflation risk, which is something not often taken account for. With inflation at about 2.6% per year over the past decade, and possibly higher going forwards, it is the impact on the purchasing power of your portfolio that is at risk. If inflation were to average at about 3.5% per year going forwards, you would see the real value of your funds half every 20 years. However, by investing in assets like equities, the aim is to provide growth over and above that, to ensure that your portfolio overall keeps pace with inflationary pressure.
There are many other risks like credit, currency and liquidity, to name just a few, that we consider when investing for clients, and all of these are measured when managing the portfolio, to mitigate against risk, but providing enough to achieve the return required.
Here at Simply Ethical, we can provide you with a range of investment options taking you through a hassle free process, taking into account your attitude towards risk and return.
Book your free online consultation now at www.simplyethical.com/free-consultation