We recognised a long ago that getting people to understand what Risk actually was was a much better strategy than asking them how they felt about something they knew nothing about. (Remember our friend, the Heart Operation Patient).
There are literally hundreds of risks and there is 1 home truth - There is NO way to avoid risk. Even the most conservative, cautious investor exposes themselves to risk. All you can be sure of is that you have the CHOICE to pick the risk you want to expose yourself to.
While there are hundreds of risks, there are four tenets of risk that generally need to be considered for investment:
Default Risk - The risk that your asset can actually disappear. Most people think that Banks are safe, and that their term deposits will always be there. While it may seem unlikely they can disappear, did you know that in Australia There is NO such thing as capital guaranteed Term Deposits? Now that is something to think about! Other "Safer investments that don't use Shares etc (ie Property Trusts, Mortgage Funds and other Fixed Interest investments have defaulted, gone bust, liquidated, whatever you want to call it - and taken all investor funds down with them.
Sometime risk is where you least expect it!
Asset Selection Risk - What if you pick the wrong asset class? Below is the historic returns for the median investments in Shares / Property / Cash in Australia with figures supplied by the Real Estate Institute of Australia, RBA and the ASX. If you'd picked cash to put your money in over that (and any prolonged time frame, you would have opened yourself up to the prospect of not making as much money as you could have safely made in Shares and in Property.
Share Selection Risk - If you got excited about the result of shares in the previous chart, you give yourself another brand new risk - what if you pick the wrong shares?
We have a method of investment that makes sense, and does not expose you to picking the bad shares (That go down and stay down) or the worse shares (That go down and disappear!) - and doesn't even try to pick the winners and losers (which is impossible to do consistently) - it involves a very logical and sane approach to investment and is something we'd gladly discuss with you one on one - Contact us
Volatilty - For growth to occur, all returns have to be volatile! Below is a chart of market returns in Australia since 1970, and as you can see, it hasn't been a nice smooth ride to the top, but it has definitely had a much better return for those with the timeframes to benefit.
Market Return Chart
The way to think about Volatility is to consider the incomes self employed people vs employed people. Generally, Self Employed People have higher incomes over time, but they never have a constant or consistent income stream as opposed to their employed counterparts. Generally, it is self-employed people on higher incomes long term… but the ride is often a rocky one.
How do you survive in a risk prone world?
The best way to achieve higher returns in investment is to understand the volatility involved. You should look to invest in an asset with a mitigated default risk, invest in a range of asset classes so you mitigate Asset selection risk and as far as Share Selection risk goes - don't gamble on the shares or managed funds that you think will work. Investigate Indexing - and this leads to what I think is a very "Balanced" approach to investing and if you've worked with a team that can get you to understanding the above, you'll be far better placed to make an investment rather than relying on a tick box questionaire to determine your fate!
It makes sense to do what is simple and understandable - it does not have to be unnecessarily complex.
It is clear to me that more Education is the key to successful investment. We need to break down the smoke and mirrors that have clouded the industry and educate the masses in a way that all can understand. This is the key to a successful, long and prosperous investment.
