Win the Investment race
Written on the 28 October 2016
It's been a volatile time on global investment markets, as shares and other assets are knocked about. At times like these it's little wonder that more cautious investors decide it's too risky to approach the start line.
No sensible person would take risks with their hard-earned cash for the sake of it, but the paradox of investing is that there's no avoiding risk if you want to achieve financial security.Risk vs volatility
Investing is an inherently risky business, but perhaps not in the way you think. While it's common to hear people talk about volatility as a byword for risk, they are not the same thing.
In investment markets, volatility refers to daily price fluctuations. Risk, on the other hand, is the possibility that an investment will provide a lower return than expected over your time horizon or even a permanent loss.Short-term volatility is only a risk if you need to sell investments after a big price fall. The longer your time horizon, the less important volatility becomes.
That doesn't mean you can afford to set and forget your investments. All investments involve some form of risk. Here is a rundown of some of the main types of risk:
General market risk
share prices fell across the board. Market risk can cause problems for investors who need to sell assets into a falling market to raise cash, but it can also provide opportunities to pick up a bargain.
Interest rate risk
savings accounts and term deposits become more attractive.
Exchange rate risk
of an overseas fund or shares in a local company that hedges its currency exposure.
That may sound like a lot of risk, but without accepting some degree of risk you are unlikely to earn the returns you need to keep ahead of inflation and achieve your financial goals.
If you are close to retirement, you may wish to reduce the overall risk of your portfolio to protect your capital. Even so, it's still wise to keep a portion of your money in higher risk investments such as shares and property to produce the returns you need to last the distance.
Given that today's retirees can expect to live well into their 80s, the biggest risk of all is the risk of outliving your investments, or longevity risk.
Shares, property and bonds all perform well, or poorly, at different points in the economic cycle. So diversification across and within asset classes and geographic locations is the best insurance against a period of poor performance in a single investment or the broader market.
If you would like to discuss your risk tolerance in the context of your investment portfolio, don't hesitate to call.