Managing investment risk

Paul Bonetti

Origen Private Client Adviser

When markets are experiencing volatility, it can be a human instinct to withdraw investments from market risk and shelter them in a safe haven. Paul Bonetti explains why remaining invested in the markets can be beneficial over the longer term. If you are concerned about your investments, please contact your Origen adviser who can review your attitude to risk and your financial objectives to help you make investment choices that suit your financial needs. During 2020, we have seen market volatility across the world as COVID-19 has impacted economies and trade.

Remember your objectives
Investment uncertainty can be unsettling in the short term – but remember what you decided to invest in. If you decided to invest in funds which have exposure in equities, then market downturns should be expected and they are generally shortlived.

Market downturns will normally impact most if not all global equity indices, but for the purpose of this article we are going to concentrate on the UK and the FTSE All-Share Index. The FTSE All-Share index tracks the market value of the FTSE 100 and FTSE 250 combined, plus almost 300 smaller businesses. It is the broadest market index, capturing about 98% of the London Stock Exchange. The FTSE 100 tracks the value of the 100 biggest London-listed companies only.

Over the last 30 years, the FTSE All-Share index has seen a rise in 20 years and a fall in 10 years, with consecutive year losses happening only three times. Over these 30 years from 1989-2019 the FTSE All-Share index has risen by 348.21%, which highlights the historic growth of the UK market, particularly as it does not include reinvested dividends which add to investment returns. Although past performance should not be used as an indicator of the future, history can give valuable reassurance on longer term growth potential of equity investments at times of short term volatility.
 
Review your risk levels

Your chosen funds should reflect your own attitude to risk. Each fund manager will use their expertise to identify suitable investment opportunities within their fund mandate.

Generally there is a trade-off between risk and return, so the more risk you are able to take, the greater the potential volatility you could see on your investments. At key points, such as your selected retirement date or upon reaching a target value, it is worth considering reducing the level of risk in your investments. The risk in your investments need to reflect your outlook and your capacity for loss, which will be determined by how vulnerable your financial plans are to a fall in value, both from a capital and income point of view.

The challenge of timing the market
At times of difficult or falling market conditions, human behaviour can drive investors to withdraw their investments, but invariably this response is after a sharp fall has already happened. Being out of the market also brings a second problem of when to re-enter the market – and invariably again, this decision will be made after there has been an initial upturn – meaning that your investments miss out on the start of a recovery. In many instances sitting tight and staying invested is the best option.

Spreading your investments across different types of investment i.e. equities, property or bonds or different geographic areas is one way to help you protect your portfolio from downturns. For example, a market downturn in one asset class may be balanced by an upturn in another area of your portfolio, so it is important to avoid having all your eggs in one basket. There can be occasions such as the global financial crisis in 2008 when downturns are more widespread and this can have an impact on a wider range of investments, though the level of impact will still differ by asset type/region.
 
Another strategy is making regular investments. This ensures that you buy at variable prices which means you avoid investing a lump sum at a peak in market conditions.

It is important to remember that the only way you will actually secure a loss is if you withdraw the investment. So the old adage of keep calm and carry on can be good counsel. If you do not need to access the funds, then you should consider keeping the money invested to give your investment the opportunity to grow again.

Looking for alternatives
If you do look for a safe haven or more secure investments, such as cash, then you need to recognise that the effects of inflation may reduce the real value of your funds in the future. This is especially true now as inflation is currently higher than the returns on most cash based investments. However, we always recommend that you have access to cash in a rainy day fund of between three to five months of your normal expenditure.

Turn to us for advice
Our advice services can help you to manage the investment twists and turns along the way. It is important that our reviews take a look at the overall picture and your financial needs. We also take account of your own investment experience so that you understand the nature and the risks of our recommendations.

Our advisers can review your financial objectives and recommend an investment strategy which is suitable for you. Our advice services can ensure that your portfolio continues to match your attitude to risk and remains suitable for your circumstances. 

This article is for information only and is not personal advice. Please remember that investments can go down as well as up in value, so you could get back less than you put in.

The content of the article is correct at the time of publishing, July 2020.
CA5417 Exp:07/2021

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