Chartered Financial Planner and Chartered Investment Adviser, Russell Hammond of AES International, provides us with his quick take on investment risk and how that risk should be best managed in an investment portfolio.
“When markets are rosy and everything is going up, managing risk and promoting portfolio diversity really doesn’t seem to be all that necessary. However, lengthy periods of low market volatility can be followed by short, sharp (and sometimes very painful!) periods of excessive market volatility. There hasn’t been a better example of this, recently, than in February 2018.
When it comes to pricing the major markets Efficient Market Hypothesis has proven, beyond any doubt, that the price we see (for the efficient markets) is the correct price based on all available information. The S&P 500 (representing almost 60% of Global Market Cap), would be considered a highly efficient market due to the vast number of market participants.
With this in mind, therefore, asset allocation decisions should be driven by individual tolerance to risk, and capacity for loss, rather than making judgement calls on whether a market is considered to be expensive or inexpensive, (invariably made during market downturns)- as tempting as the latter may be sometimes.
Asset allocation decisions should be constructed around your own investment goals and objectives, however, during a period of low market volatility it is very easy to find oneself in a portfolio of investments that are actually much higher risk then you would like them to be. How does this happen? Well, as mentioned above, the concept of managing risk, during periods of low volatility, can seem obscure and counter-intuitive to the satisfaction of your long term financial goals. However, when volatility picks up and risk becomes a much more clear and present danger to you achieving those very same financial goals, the urgency of managing risk can all of a sudden seem much more obvious. The thing with it is, however, is that the amount of investment risk that you are sustaining should have been assessed before volatility picked up, not during. Decide, before, you embark upon the investment as to whether the amount of risk and associated volatility is right for you and your own particular circumstances, including capacity for loss.
Russell Hammond has been advising expatriates on their financial planning and investment needs for some twelve years. If you would like an initial, no obligation discussion with Russell to understand how he may be able to help you, please use our contact form on the right, or below if on mobile, to make contact with us today and Russell will be in contact with you immediately.
BA (Hons), MSc, FPFS, MCSI, Chartered Financial Planner (Fellow) & Chartered Investment Adviser