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Our Attitude to Investment Risk is Subjective

 

Formula 1 drivers take risks when they drive in a Grand Prix

 

If you or I tried to drive like them it would be considerably riskier, as we don’t have theirs skill and expertise

 

So, how can you assess you attitude to Investment Risk?

 

All firms will have their own measures of risk. Some may be based on numbers 1-10, some 1-8, some will start at “Cautious” and end at “Aggressive” etc, but there is no one defined scale against which you can compare these - as we say, it is subjective rather than objective!

 

Rather than try to "pigeon hole" you, we will spend quite some time with you discussing what we mean by each of these statements and telling you what sort of areas your money will be invested in. This will be in different proportions depending on your ages, term of investment and objectives.

 

Asset Classes

 

90% of a portfolio’s return is derived from the underlying asset allocation. Long term investment success depends upon holding, reviewing and realigning, where necessary, a portfolio diversified by asset, geography and fund.

This is no easy matter and a Cautious investor will require a different approach to a Speculative one. For different objectives a different risk profile and therefore investment spread, will be required.

We avoid at all costs trying to follow “flavours of the month” and instead construct portfolios that will stand the test of time. Our service proposition with you is to provide advice and financial guidance over the long term, not sell you the latest fashionable fund or product.

There will be times when certain assets have underperformed and vice versa; this is the whole point of diversification v speculation. Here are some of the most common asset classes.


Fixed Interest


When a company or any institution wants to raise money, they can do this in a variety of ways. One is to borrow the money from other companies and individuals by issuing debt. Say, for example, ASCO plc supermarket wants to raise £15M to build new stores, it could do this by issuing a bond for ten years paying x% interest a year and repaying the capital at the end of the term. The creditworthiness of ASCO plc would be assessed by independent credit rating organisations and rated accordingly – AAA, AA, BB etc. The lower the credit rating the higher the interest rate, or “coupon”, as the company has to reward the investor for the increased risk they are taking.

The fixed interest asset class includes both Gilts and Corporate Bonds. Gilts are issued by the British Government and are considered one of the safest forms of investment. Gilts provide a good diversification from equities but returns are generally more modest. Corporate Bonds are issued by companies. They are considered riskier than gilts but pay a correspondingly higher interest rate to investors. Bonds tend to be negatively correlated with equities and so provide diversification.

A collective investment scheme manager, such as a Unit Trust, will blend many companies and different durations of bonds and gilts to further lower risk.


Equities


When a company goes public, i.e. it becomes a plc, its shares are open to all to buy. Shares are also known as equities. The value of the share will be reflected in the company’s prospects for growth or earnings, or a combination of the two. Equities are therefore more volatile than Fixed Interest assets.

Again, a collective investment scheme manager, such as a Unit Trust, will invest in many companies and different sectors (e.g. banks, manufacturers, retailers etc) to further lower risk. Some funds look for income, some for growth. Some are sector specific and some are geographically specific too.


UK Equity


UK Equities have historically provided good returns over the mid to long-term. However equities tend to be volatile over shorter periods and the uncertainty over the future movements of their prices make them a riskier investment than some other asset classes.


US Equity

 

These potentially offer a more diversified portfolio than UK based equities. Exposure to the world’s largest economy can offer the prospect of higher returns, but also a higher level of risk than UK equities.


European Equity


Not totally correlated to UK markets and therefore providing diversification. Many European companies pay higher dividends than UK counterparts, plus we have the exciting addition on developing ex Eastern Bloc countries growing their economies.


Far East Equity


Exposure to markets that historically have experienced dramatic price movements and higher growth economies provide potential for higher future returns. Consequently there is a corresponding higher level of risk and short-term price volatility. Far Eastern equities also provide diversification from UK equities.


Emerging Markets


Not totally correlated to UK markets and therefore providing diversification. Potential exposure to smaller emerging markets can offer the prospect of enhanced returns but a higher level of risk than UK equities. There is a corresponding higher level of risk and short-term price volatility. This classification includes countries such as Brazil, Russia, India and China although the latter two are expected to be amongst the largest economies within the next 10 to 20 years


Commercial Property


Property funds used to enjoy relatively low volatility and provide good, reasonably stable returns over the mid to long-term. They also provide good diversification from equities. The Credit Crunch wiped out many of the stellar gains made in this class since 2005, but a small percentage in this class is useful


Alternative Investments/Derivatives


Many collective investment schemes have new powers to invest using sophisticated financial instruments to lessen volatility in portfolios. Not all funds use these techniques and this is neither a positive or a negative – it depends upon the fund manager’s remit and objectives.

Finally, bear in mind that overseas investments are also subject to movements in currency exchange rates and these factors in combination lead to above average short-term price fluctuations.

 

 

Are your investment as risky as an F1 driver?

 

 

 

     
 

Asset Investment Management Ltd, Independent Financial Adviser (IFA) in Norwich, spends  time discussing their clients attitude to investment risk. This can be cautious, balanced, adventurous, speculative or high. A mixture of different asset classes.


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Asset Investment Management Ltd, Drayton Old Lodge, Drayton, Norwich, Norfolk, NR8 6AN
Telephone 01603 869988 e-mail enquiries@asset-im.co.uk
Independent Financial Advisers

Authorised and Regulated by the Financial Services Authority No 462797.
FSA Register www.fsa.gov.uk/register
 
Tax advice is not regulated by the Financial Services Authority.
Registered in England and Wales
company registration number 5880144.

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