Risk versus Reward


Risk versus Reward

Have you ever considered your ‘risk appetite’ when it comes to investing money into your Pension or ISA? There are lots of factors which make up how you feel about investing and how much risk you are comfortable taking as an individual. The Money Advice Service has some useful notes on the subject here.  

On talking about risk, the recent EuroMillions jackpot of £71Million is a good example. It was enough to entice millions of us to stake £2.50 on next week's draw, with the expectation that we were unlikely to win; and suffer of a loss of our £2.50!  But the upside of  this  was  a  life  changing  amount  of  money,  so  maybe  it was worth  the  bet? To illustrate; our risk appetite for this draw was ‘very adventurous’ probably as £2.50 is an amount we can comfortably afford to lose – defined as our ’capacity for loss’ when investing. 

Investment into ISAs, Pensions and other products will have a wider range of potential outcomes and a considerably longer investment timeframe than the recent EuroMillions draw. As Independent Financial Advisers, we have access to thousands of individual investment funds, normally arranged into portfolios, designed to have specific characteristics, one of the most important for us being volatility. Volatility is the measure of how much, or the range by which, an investment increases or decreases in a given period.

Risk Vs Reward.JPG

To illustrate the point, the graph shown here shows the performance of some portfolios we manage for our clients. You can see the least volatile 'Risk Level 1' (the orange line - 'F') to most volatile, 'Risk Level 5' (the grey line - 'A'). All are based on someone investing their money for at least 15 years, in a 'Long' portfolio. 
 
As comparatives the below are also displayed: 

  •  FTSE 100 - 'D' (which is made up of the top 100 equity shares on the London Stock Exchange) 

  • UK Consumer Price Index - 'G' (a measure of consumer inflation) 

  • Bank of England Base Lending Rate - 'H' (a measure of a 'risk-free' return)  

Over the last 10 years, you can see a number of rises and falls in value, but you can see a general trend upwards in value. If you left your money in a UK retail bank deposit account over the period, you would be lucky to see a rise in value of much more than the Bank of England Base Lending Rate, but one measure of inflation suggests that the cash value has deteriorated by more than 10%. This suggests that taking no investment risk is bad for your overall wealth.  

Looking at the investment portfolios gives us some more things to think about; ‘Risk Level 1’, which we would usually describe as ‘Cautious’ is closer to a straight line than any of the other portfolios. At virtually all points it has beaten inflation and would have given you a real investment return. It has however underperformed the other portfolios; it has a return of 97%. However, ‘Risk Level 5’ or ‘Adventurous’ has a total return of more than 214% over  the  ten  years  we  look  at  above. 

So, why might you not want to go with the Portfolio at ‘Risk Level 5’?  This portfolio is suited to someone with an 'Adventurous' attitude to risk - they are more comfortable that there is likely to be increased volatility, but with the upside of potential increased growth. As the volatility is quite pronounced, a sell to cash decision might produce a significant profit or even a significant loss depending on timing.  

Lower levels of volatility in the Risk Level 1 & 2 portfolios give, as expected, less of a spread of outcomes, so timing becomes less critical and the investment outcome more certain.  

As IFAs, before recommending an investment portfolio to you we will ask about your attitude to investment risk, past experience of investing, objectives and timescales. We'll thereafter ask you to complete an on-line questionnaire - the result of which we discuss and agree with you before making any recommendations. 

We want you to fully understand the investments held in your pensions, ISAs and other products; and are taking the amount of risk you are comfortable with. The outcome of this, with regular reviews, is that you are more likely to meet your objectives (and won’t have to pin your hopes on a large EuroMillions win!) whether this be to retire earlier, send your children to university fully-funded or some other life goal that is important to you.

Arrange an Introductory Meeting with one of our Independent Financial Advisers

Please contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196 to arrange an introductory meeting, at no cost to yourself. 

About Martin-Redman Partners  

We are a team of experienced Financial Advisers who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice.   

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.