It’s time – whether you’re just starting to build your portfolio or a sophisticated investor with extensive experience, the instability of 2020 has offered up the opportunity to revisit your risk profile, potentially increasing your returns.
If you invest with an advisor, you’ve likely undertaken questionnaires on risk, endured discussions on risk v reward, and have thought long and hard over the question, “How much can I afford to lose?”
These are some of the methods advisers use to determine your risk appetite, enabling us to invest your money in the most effective and prudent way. You’ve been well briefed on the need to take risk in order to achieve a better return, with term deposits being at the bottom end of the return v risk outcome.
From an abstract concept to concrete reality
For the most part, risk is an abstract concept. It’s something we talk about and manage for, but it rarely becomes a reality. This is because markets move up more often than down over the long-term. We set the asset allocation and purchase shares and managed funds that, combined, minimise through-the-cycle volatility. This provides balance to the portfolio and will ideally position us to limit capital loss when the once in a decade market shock hits.
And in 2020 it did, causing years of risk discussion and abstract thoughts to become a reality.
The fallout took me back to my early career in 2007 – 2009. Like then, I ensured clients understood the real level of risk they were taking and that they could endure these risks. Only once that was understood and they invested accordingly, did they begin to trust the bigger picture. Our clients continued to invest through 2020, with a portfolio that matched their risk profile, and are now seeing the rewards for staying the course.
But this discussion is not designed for those of you that made it through 2020 not only unscathed but in a better financial position. This has been written for people who lost sleep, concerned about their future cash flow and fearing further portfolio devaluation.
Investing according to your risk appetite
Last year taught us our level of ‘Real’ risk. Risk, as defined in textbooks and questionnaires, is to prepare the investor, for a market fall and the subsequent secondary implications. I liken it to the quote from former boxing champion Mike Tyson who said, “Everyone has a plan till they get punched in the mouth”.
The difference between a textbook and real-life definition of risk can feel like this sometimes.
Risk, and the subsequent rewards, are manage by asset allocation and investment selection. If you get these components right, then the bouts of market dislocation are infinitely more manageable, and in some cases, can be a catalyst for great investment returns.
If you experienced more than the occasional worry or late-night ruminating about your investments, now is the time to revisit your true risk profile and align it to your goals and objectives. You’ve now had the true experience of risk, not one derived from a textbook or questionnaire. By resetting your portfolio today, you will have a major impact on your future.
So… please don’t be complacent. Use the experience of the last 12 months and book in a time with your advisor to revisit your risk profile – It could make substantial difference to your returns, retirement and quality of life.
