Risk is a word that we would all say we have an understanding of. But in practice it is much harder for us to say “this is me; this is how much risk I can take”.
The advisor faces a challenge to strike the appropriate balance between risk and return for his client. Be too conservative and the client may earn many thousands less in returns over the years than they were capable of. Be too aggressive and the client will be uncomfortable with the volatility. This will increase the chance of them forgoing the strategy and then going back to a defensive fixed interest only type strategy – again to the detriment of earning potentially several thousands less than if the right balance had been struck in the first place and they had stuck with it.
Ironically clients are often not in a position to clearly say up front – yes that’s me, I’m a 7 out of 10 on the risk and return scale. The clues generally come from conversation on the pro’s and con’s of various investment types, the clients previous investment experiences and a gut reaction.
The ultimate test will be time as the market delivers positive returns and the occasional negative and the client has the opportunity to react to these – particularly the negatives.
It is a reality that in any investment plan, that has an element of growth, there will occasionally be a negative return. The greater the growth element and the greater the expected return the greater is the potential negative return that may be incurred along the way and the more often it may occur.
Our reward is a greater return the more volatility (risk) we are able to take on. There is no point in that however if our starting point was too aggressive and the investor has long since left the journey.
There is I should hasten to add, nothing wrong with being conservative, middle of the road or aggressive when it comes to investing. The important issue is to know yourself so that the best investment result is achieved for you.
One of the functions of these newsletters is to give you greater background information on how markets work and what should be your expectations with regard to returns and the time period required.
It is entirely possible that your attitude to risk might change over a period of years. You may wish to have less volatility or alternatively more, with the intention of earning a greater longer term return.
For that reason, your comfort level with risk is an issue we should continue to discuss, and you should let us know if you wish to make any changes in this area.
