Risky Business

Posted May 21st, 2012

One of the most difficult aspects of investing is balancing risk with return. Put simply, the less risk you’re willing to take, the less your investments will yield. It is a gamble and there are no guarantees but it is possible to stack the odds more in your favour as the market provides a return which can be captured quite easily.

Any IFA will tell you that (or they should). We can no more guarantee a return on investments than the weather man can tell you it will snow tomorrow. Course, its May now so it shouldn’t. And the weather people will tell you so based on the weather patterns and data they have available. But does that really mean it couldn’t snow?

Financial risk works in a similar way in so far as, no one can really make 100% full proof accurate predictions. If we could then we’d all be rich right? And if that were the case the markets would crash anyway.

If you’re happy to take higher risks then that is fine and up to you as an investor. Your potential yield will be greater, but the chances of your investment actually coming to fruition is lower. Hence the risk.

I remember complaining to my Dad once about how late the bus I usually caught to college would be. It was supposed to be there at 8am but would often be up to half an hour late. My Dad pointed out, that as annoying that is, the bus that turns up early is even more annoying. You can’t control that by waiting.

Roulette wheel

When clients and customers are not being given all the information that they require in order to assess their own financial risk (often aided by an IFA), then they are at a disadvantage. However, the situation is compounded further when those same advisors are left in the dark as well. Exactly how is it going to serve anyone well when a scheme that is labelled low risk, turns out to be a very high risk indeed.

This mean loss of funds for clients and customers and a dent in the trust that we are trying to reclaim. It is up to the advisors involved to truly understand the product and it’s high risk nature. The Arch Cru Investment funds were given a vote of confidence of sorts by the Investment Management Association. This gave weight to the “low risk” status. It turned out to be anything but.

As an Independent Financial Advisor, as far as the client is concerned, the buck stops with me. It is up to us, as IFAs, to understand the products inside out. It seems that this was the case with Arch Cru. A little investigation in to the product would have highlighted the genuine nature of the risk involved.

As a client, you need to be made aware of the risk. It is up to you to decide how much risk you want to take. The market owes you a return and it rewards investors who stay the course.

So if you want to avoid the next Arch Cru (or Bernie Madoff) stop speculating and start investing.

There is plenty of evidence out there that markets work. If your IFA is not prepared to share his research with you then maybe they have something to hide.

For a chat about investing NOT speculating why not get in touch.

Flickr image/Håkan Dahlström

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