I started work in the Financial Planning industry in October 2007, right before the financial crash and learned, like many others in the industry working in the industry at the time, huge amount about investment risk and investment volatility.
I’ve had lots of conversations with clients whereby you have had a good chat about their priorities, their budget and so on, and move forward with the decision to invest a pension or investment or regular saver.
And then a conversation would come up about how much risk am I taking or how much could I lose, and I think it’s one of the best questions that you can ask when investing.
Identify and Quantify Risk
So in terms of identifying the risk, that’s a good place to start.
The industry has come on a huge amount in terms of measuring risk since 2007.
When you’re investing, we do a quick risk profile questionnaire at the outset. That establishes the risk bracket that you are in.
The first thing to do is when you identify the risk bracket, to identify how much volatility or fluctuation in the price of the investments that you might see during a 10 year time period, and what the returns can be over that time period factoring in and the price volatility – so how much risk and return can you expect over the 10 year time period.
At least then you know if markets deteriorate, as we’ve seen this year, what can be expected.
The next thing then, is to diversify so – across different regions, we’ve seen this conflict in one region, so to make sure you’re spread out across the world.
I put up a post on LinkedIn recently and it showed that certain companies had seen a big jump in the share price during locked in and they had seen a big drop this year.
Diversification across different industries is also important you’re not getting total exposure to just one.
Lastly, investing across different assets such as stocks, cash, bonds, property and alternatives like gold and commodities.
Limit Exposure to Single Investments
In keeping with diversification, I think the next thing is that if you are going to invest in a particular sector or region or asset, it’s to keep that to about 20 percent of the overall portfolio and to make sure all your eggs aren’t in the one basket.
Reputable Fund Managers
I think investing with a reputable fund manager is crucial. A company with a track record of delivering good performance and customer service for clients.
The last part is remaining invested, because when things do deteriorate in the markets, as they are at the moment, the first instinct is to exit the markets and then reinvest when they recover or settle down. But what can often happen is that you can exit the market on the way down and then you miss the recovery and so that that is a risk.
If you apply the above principles to your investments, you will go a long way to managing your investment risk