What is "Real" risk?
William Buck Wealth Advisory - Investment Update
What is “Real” risk?
You have experienced the questionnaires on risk, you have endured the discussions on risk v return, and you have thought long and hard over the question “How much can I afford to lose?”. These are some of the methods we use to determine your risk appetite, allowing us to invest your money in the most effective and prudent way. You have been well briefed on the need to take risk in order to get a better return. We are all familiar with the proposition that, to have a return that exceeds a term deposit, you need to take on some form of risk.
For the most part, risk is an abstract concept. It is something we talk about and manage for, but it rarely becomes a reality (that is, markets go up more than they go down). We set the asset allocation and purchase shares & managed funds that in combination minimize through-the-cycle volatility. This provides balance to the portfolio and will ideally leave us in a position to limit capital loss when the once in a decade market shock hits.
Well, as we know, 2020 turned many years of risk discussion and abstract thoughts into reality.
It took me back to my early career in 2007 – 2009. Similar to back then, I trusted the discussions I had with clients; they understood the level of risk they were able to endure and together we lifted our eyes toward the bigger picture. By investing through 2020, with a risk profile matched by your asset allocation, staying the course was a sound decision.
But this discussion is not designed for those of you that relate to the above experience. This is designed for people who lost sleep, were concerned about their future cash flow and feared further portfolio devaluation. 2020 taught us our level of ‘Real’ risk. Risk, as defined in textbooks and questionnaires, is to prepare the investor, as best they can, 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 managed by Asset Allocation and investment selection. If you get these central components right, then the bouts of market dislocation are infinitely more manageable, and in some instances, can be a catalyst for great investment returns.
If you experienced more than the occasional worry or odd late-night ruminating about your investments, then now is the time to revisit your true risk profile and align it to your goals & objectives. You now have the true experience of risk; not one derived from a textbook or questionnaire.
So, please don’t be complacent; use the experience of the past 12 months and book in a time with your advisor to revisit your risk profile - it could make all the difference.
In relation to market commentary and our outlook, please revisit the Sept Qtr publication via this link (https://au-sn05.marketo.com/index.php/email/emailWebview). Our general thoughts have not changed dramatically since then. Although with the US looking to pump almost $2 trillion of stimulus into their economy in just over a month, I am on high alert for the underlying issues they are facing that could reverse the current upward trend.
COVID has sped up government intervention in free markets, and the resultant sugar rush is a little concerning.
Nigel Credlin
Director - Wealth Advisory