RISK - A VERY IMPORTANT FOUR LETTER WORD

Risk is a small word, but the biggest issue for investors to consider. One of our main objectives with this research is to help you have a better sense of risk before you make any investment.

As a private investor the risks that concern you are primarily:

Not achieving a predetermined growth target e.g. so that you can pay the school fees
Experiencing extreme volatility in the value of your investment
Losing money

It is extreme volatility in the value of their investments on which most investors focus and about which they tend to be most concerned from day to day. It frequently triggers sales, through fear of losses, and ironically creates the losses which they fear the most.

In turbulent times the antidote for panic is having a rationally structured portfolio, where you have a good idea of what investments you hold, and why. If you have a well diversified portfolio, with a focus on high quality investments, and in particular high quality and inherently diversified funds, you should not need to panic and sell. Panic sales tend to arise because investors misunderstand the level of risk with which they were comfortable and/or were invested over an inappropriate timescale.

EMERGING MARKETS ARE HIGHER RISK INVESTMENTS

The investments that we are considering here, in emerging markets, are higher risk investments. Yes, this states the obvious, but you should be sure you understand how this risk might manifest itself, and whether you are comfortable with this. We suggest that as well as your being attracted to some years of 100% growth (such as with technology in 1999), you must also accept occasional years of 50% losses, and take at least a 10 year view. Many higher risk technology funds fell in the region of 80% after the top in 2000.

Our experience is that high risk funds often do not provide the consistent year to year performance of something like a good mainstream UK Stock Market fund. Not only will you see the value 100% up and 50% down over relatively short periods, but may experience lackluster performance for some years, until it explodes upwards again.

Are higher risk investments right for you? Imagine you invested £10,000 just 6 months ago. There is some unexpected news, and the value of your fund falls to £5,000, down 50%. How would you feel?

Would it cause you grave concern and worry? Or …
Would you be relatively relaxed, because you are comfortable continuing
to take at least a 5 year view?

Even if you are relatively well off, with secure income, such falls may still give you sleepless nights – how you might react is a very personal matter.

“MY INVESTMENTS HAVE FALLEN 50%!!”

If this would be a shock you would rather not experience, don’t buy higher risk investments, and be sure to sell or reduce those that you already hold. It might mean you miss out on a continuing growth – or that you don’t suffer sharp losses, but that isn’t the point. Whether you should remain invested is about you and your attitudes, not about markets. You need to make a hard-nosed decision about whether you can cope with risk investments.

The Stock Markets can and do play games with your mind, in particular with the powerful emotions of fear and greed. Some investors may just need assistance to think a little more rationally.

For example, do you have secure income, more than enough on deposit for peace of mind, and no debts? Just re-affirming this will help many stop worrying. But if despite this high level of personal financial security you still can’t sleep at night with the possibility of your investments falling sharply, you should not buy higher risk investments, whatever you might think about the Stock Market and its potential.

This is a very basic approach to figuring the level of risk with which you are comfortable, and there are more formal approaches for testing your risk tolerance, which would ask questions such as:

Do you think of risk as uncertainty or opportunity?
Are you more concerned about possible gains than possible losses?
when things have gone wrong financially in the past have you adapted easily or uneasily? Or have you looked for someone to blame?

If you would like to go through a more formal review of your investment objectives, and your risk tolerance, do get in touch, and we will let you know the details and cost.

I have received your Top Funds Guide in the post and find it a very valuable source of information....
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