Risk Is Just As Important As Returns

We have all experienced unprecedented change in our lives over the past months. As we go about adjusting to the ‘new normal’, we felt it was a good time to talk about the interplay between investment risk and investment returns.

There is a clear link between increased risk and expected future market returns. Unfortunately, when risk is overlooked, the end consumer is left to pick up the pieces when a significant market downturn strikes.

The OECD estimates Australians lost an average of 21.60% through the GFC during 2008 and 2009. During this time, we know it prompted many investors to switch investments to cash at the worst possible time. Fast forward 11 years and we are now in the middle of COVID-19. The GFC and COVID-19 shows us that risk matter.

Why Does Investment Risk Matter?

Studies show that investors feel the pain of investment loss far more than the joy of investment gains. Further, the power of compounding interest matter. For example, a 50% loss requires a 100% gain to get a portfolio back to where it started.

If risk has not been appropriately accounted for within a portfolio, there is a higher probability of loss and the propensity for investor behaviour to change. This can result in investors liquidating assets at the wrong time as well as losing the ability to take advantage of compounding returns.

Therefore, clients win over the long term by losing less and staying the course - and the way to do this is by managing risk.

What Can We Do To Manage Investment Risk?

Barwon Financial Planning will continue to follow our process – we progressively sell more expensive assets and buy into assets as they get cheaper. We stay diversified when uncertainty is high, and concentrate positions when things get really attractive. We follow this process because, irrespective of which path markets take over the long term, following this discipline will control the risk in your portfolio and maximise return within those risk limits.

As always, if you have any questions or concerns please let us know.

Important Note

This blog post is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Barwon Financial Planning strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.