I wish I knew at the age of 25 what I know now. Back then, with my first real money to invest, I was clueless about how much risk I was prepared to take and what returns I was looking for. So I filled in the old-fashioned question-and-answer thing every investment adviser gives you and I was advised that I fell into the “moderately aggressive” category.
Bear in mind that the questionnaire provided no sense of context about my long-term investment needs -- I was young, prepared to take high risks, but I had no idea what the consequences would be of being slotted into a one-size-fits-all investment “bucket”.
Fast forward 12 years and I was horrified to see how my “moderately aggressive” portfolio had performed. Basically I got a cash-like return plus about 2% -- in other words, I just about matched the inflation rate. I might as well have put my cash in a bank savings account. I was very disappointed, to say the least.
My bad experience got me thinking about the inflexible tools investment advisers use -- aren’t they totally outdated? Don’t they give investors a misleading picture about how they should balance their portfolio regarding risk so that it stays in line with their personal goals?
It also made me realise that advisers tend to peg you down a level; in my case, the portfolio was definitely tailored to be more “moderate” than “aggressive”. I was only about 50% in equities, whereas the weighting should have been much, much higher, given my young age and appetite for risk. Anything up to about 80% in equities would have been more suitable.
My conclusion was that, when you talk about risk, you should be talking about the amount of chance you’re prepared to take that you’ll lose money. What’s your comfort zone? It’s nothing to do with grand talk about volatility and all that stuff you hear from analysts in the media.
Your expectations about returns have to be balanced with how much money you’re prepared to lose. That’s the key. Only then can anybody talk about where your money should be invested -- which asset classes, which shares, and so on.
That’s why I urge everybody to log in to our new online analysis tool, Riskalyze. It’s ideal for every kind of investor, whether you’re just starting out with EasyEquities or if you’re in one of our Emperor managed portfolios or the Unit Trust.
Riskalyze will help you get a better grip on how you’re REALLY positioned with regard to the risk-return balance of your personal investments. According to your stomach for risk, and the kind of returns you’re aiming for, it will suggest a suitable mix of investment strategies.
In my next blog I’ll tell you more about why traditional risk assessment tools let ordinary investors down so badly -- to the extent that many bail out of investing altogether.
Remember, Riskalyze will suggest how you should rebalance. It looks at your investments holistically -- not just your Emperor investments, but things like RAs and pensions and your other assets and liabilities so remember to include your holistic portfolio, not only your investments with Emperor.
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