What is suitable and appropriate “Investment Risk?” …..
tips for conservative investors.
One of the biggest issues I’ve seen is investors who fall into to the following pattern:
- They have in the past always been in an investment that is described as “Capital Stable” or “Capital Guaranteed” and are nervous about moving or switching away from that name.
- They previously got nervous in either the GFC or another market shakeout and switched to a more conservative investment rather than wait for the bounce in their balances. They then effectively locked in any paper losses.
- Some individuals see all investing as a form of gambling and only believe guaranteed returns are investing, from a bank Term Deposit or similar type of product.
The definition is that the return you expected at the time you expected it didn’t occur. The return varied from the trend average for the given investment type.
- That can mean it did better – or it did worse, and may take more time to meet your expectations.
- Responsible financial advice does not involve “all or nothing” options – it involves nudging the returns up for a given level of probability of return over a time frame.
(Even investment property which is usually everyone’s “fail safe” favourite investment can take shorter – or – longer than expected, to rise in value and return good rents to cover the loan debt, with hopefully, minimal repairs and maintenance. That is Market volatility and “investment risk” at work.)
If you are 10-20 years away from retirement then market volatility should be a low concern, at 40 – 45 you should be trying to maximise your return whenever that can happen – without a specific time frame in mind.
As you get closer to retirement say 5 – 7 years away then you would have a more conservative set of options that mean an expected result within that time frame has a high probability of offering the expected return at the expected time. So called “Capital Stable” style products are simply so conservative that they ensure there is almost no variation from the average return over a given time. – Which is OK if you are only 5 years from retirement and you previously had high growth options in your 30’s and 40’s.
Usually a tailored solution for the individual can deliver a slightly better result for the same probability of the return you want on time.
The one size fits all “Capital Stable” funds will try to minimise internal maintenance and cost to the fund manager with a set and forget set of options. They are more suited to small balances than larger balances. Other investment options used judiciously within the conservative space can deliver better results. The right fund option at the right time.