Insider Talk: Experts Share Big Risk Overlooked By Investors

“A mis-match between risk capacity (defined as your financial capacity to sustain theoretical losses) and risk appetite (defined as your emotional ability to cope with actual losses). If you have lots of money, and little debt, you should be able to cope with volatility and the possibility of losses that brings. However, if you spend time fretting over market moves and the actual $ value of falls in your portfolio (rather than the % of your portfolio these represent), then you are likely to be taking on more risk than you can bear emotionally. Many investors also underestimate the levels of risk they already have: a large housing loan and other loans that may not be linked to investments, but is still debt. The value of the asset may fall when markets fall, but the value of the debt will only ever rise if it can’t be paid off. Make sure you have enough in reserve to cope! Plan for the best, but prepare for the worst.”

“The biggest risk clients overlook is the risk of selling their funds at the first sight of trouble should markets fall over a short-term period. Conversely this should be seen as an opportunity to invest further funds into the market although this is very much down to the adviser to proactively point this out to clients through ongoing and regular communication”

“The biggest risk that most investors tend to overlook is that of market volatility, which can be related back to their investment time horizon. If the underlying investments are high-quality funds then market volatility shouldn’t ever be a concern. The first question I ask clients when discussing a potential investment is what their minimum investment timeframe is. Some investors might say they have a high risk appetite, but if they only want to invest for a few years the portfolio will need to be structured more conservatively. Understanding your clients’ time horizon can effectively reduce the risk of market volatility.”

“Placing the clients’ interests in the centre of the wealth managers focus is key. Eliminating conflicts, corporate politics and profit driven selfishness is the first step to achieving irreproachable ethical behaviour when working for clients.  Many private bankers seem to forget this and focus instead on their own profit and the banking institutions’ profit focused strategy.  This results very often in underperformance of the clients investment portfolio.”

“Returns are paramount in the minds of investors. But the road to get there is less clear. A reactive buy and sell attitude is a recipe for failure without first understanding the economic forces at play, both global and domestic, which create volatility, and second, how to manage such uncertainty in the market. This typically leads to a gross under appreciation of diversification and of a balanced portfolio, not of assets, but of risks.”