The primary concern as an investment manager, such as Allan Gray and Investonline, is to create wealth for clients. To do this, one needs to balance performance with risk incurred in generating this performance.
Money Market fund returns will not be enough to sustain your retirement
An investor who overestimates the risk of an investment, and is too conservative, may miss out on returns in the long term. This is seen with some retirees who invest in the money market fund exclusively, fearing the volatility of other investments. In the short term, their money is probably safe, but the returns that a money market fund offers will mostly not keep up with inflation over time. In the long run, returns will be insufficient to sustain them in retirement.
The opposite is also a problem. The ups and downs may become too much to bear, resulting in funds being withdrawn before the investment has had time to provide the required return. The more equities you have in your portfolio, the riskier it is likely to be.
Matching expected risk and actual risk is key
A successful investment is when there is a match between the risk you expect or perceive and the actual risk of the fund. Calibrating your risk tolerance is a problem of psychology and the most difficult psychology to solve is often your own.
Generational and culture influences affect your risk perception
Past experiences play a big role in the way we perceive risk.
A study has shown that the Millennial generation (born between 1982 and 2000) is more conservative than their parents. Millennials experienced the financial crises of 2008 up close or through their families.
Culturally, if you were raised in a household where investments were discussed there is often more comfort with market risk.
Your personal perception of risk
Most people have had a personal experience with risk, which has made them either overconfident or has tainted their views on investments.
Risk perception is often irrational. Many people are afraid of flying but are quite comfortable to drive as they have control. However, statistically flying is far safer.
As investors, you should put more intentional thought into what risk means
- Understand what you are trying to avoid: Loss of capital, underperformance
- At what point will you become uncomfortable and identify under what conditions this would happen
- Match your risk tolerance with the profile of your investment portfolio
At Investonline we strive to determine an accurate risk profile and ensure this is matched correctly with the appropriate investment strategy. This should produce the best risk-adjusted investment returns to achieve your goals.
