When I talk to people about investing, new clients often tell me “I am low risk” or “I am medium risk”. I don’t know what that means to them. It is likely their definition of risk is different than mine so I ask them what their understanding of investment is.
The most common answer I get is that people believe that high risk investing is having a chance of losing your money. As risk and return are related, the most likely scenario of this happening is by taking a big risk and investing in something like a start up or penny stocks e.g. AIB are trading 0.95c. In these instances, you are hoping that the company you invest in will become the next Facebook and not the next Bebo.
Another type of investment where you can lose all your money is in loan notes. These are sold as secure investments where you and other investors give a business a loan and earn interest of 4% – 5% for 3- 5 years and get your capital back at the end. Some even tell you that your money is guaranteed through an insurance policy. The problem is, these are very small businesses with high capital expenditure and they can go bust very easily. And the guarantee? The insurance is only good if the company pays its premium…
You could always invest in a boring, diversified basket of large companies from different regions and industries. There are some of the largest companies in the world.
Of course, this doesn’t make them immune from volatility and they will have lots of ups and downs. This may impact you if you have a specific end date and there is a crash just before you take your money out. If this happens, it is more likely that you get back less than you expected rather than be told that your investment is worth nothing.
The MSCI World Index for example invests in 1,600 different companies. If one goes bust (Apple is the largest component of the index at 4.46%), it makes up a small percentage of your overall portfolio. For the bigger companies in the index, it is more likely that a massive fraud within the company would cause its downfall than anything else.
Of course, a a boring, diversified basket of large companies from different regions and industries is an open ended investment, so you don’t have to cash it in at the end of the term you had in your head. You can just leave it invested for longer and let it recover. You also have the option of taking out just some of it if needed and letting the rest of it recover.
If you are invested in good quality basket of stocks, your investment risk isn’t that you will end up with no money, it is the size of the ups and downs of the valuation of it. A 50% fall in value is pretty scary but you do know that it will come back if you give it enough time. It is a lot more boring than being an early investor in a start up and then losing your money isn’t that thrilling either.
If you have any questions, send me an email at steven@bluewaterfp.ie
Steven Barrett
12 October 2020