Every investment comes with some element of risk. The key for long-term investors is to actively minimise that risk while still eyeing solid returns. This is best achieved through a combination of intelligent planning and savvy diversification.
Investment risk comes in many forms, from global geo-political fallouts to the tax risks of not undertaking proper wealth planning to favouring a single asset class. No investor is immune from these risks, irrespective of their wealth profile.
Just one example, explains Anthony Palmer, Group Commercial Director at Carrick Wealth, is a wealth executive who holds a hefty tranche of his or her company’s listed shares. “Often executives believe they have the ‘inside track’, so they choose to hold their shares. But this doesn’t make sense – if the company gets into trouble, the executive stands to lose a job as well as a significant percentage of their wealth. Unfortunately, this is more common than you would imagine and can be so easily avoided,” he explains.
Another example of putting all your investment eggs in one basket could be a client with an overweight position in South African property. “Property investors generally don’t like traditional equity and fixed income investments,” says Palmer, which makes the crafting of a diversified portfolio challenging. But there are still ways to help mitigate risk, he explains. “These clients do like international property, which can still benefit from leverage and is an asset class they like and understand.”
Risk mitigation and your investment blueprint
In the hands of a good financial advisor, diversification is never a one-size-fits-all approach. It starts with understanding each client’s preferences, objectives, needs and risk inclinations and then creating an investment plan that incorporates the protections afforded by smart diversification. This blueprint must also pay careful attention to the liquidity of the underlying investment portfolio and carefully match assets with liabilities.
Similarly, this discussion would extend to the ideal ownership structure, explains Palmer. This planning process should examine how best to hold investments from a tax and asset protection perspective. It should incorporate ease of administration and reporting, together with all-important succession planning.
This may sound tedious but, for the long-term investor in particular, the risks associated with poor planning and managing return expectations cannot be overstated. Although these pitfalls fail to garner the sorts of headlines and consternation associated with riskier schemes and the ‘get rich quick’ opportunities such as Ponzi schemes, they are no less important. Which is why this aspect of minimising your risk features among Carrick Wealth’s risk reduction tips.
Carrick’s five cardinal rules
- There’s no free lunch – Investing, particularly the long-term variety, takes time and patience. “There is no substitute for saving early, saving regulatory and having a well thought out investment portfolio managed by an expert in the field,” says Palmer. Adopting this mindset helps you to avoid the frustration and disillusionment associated with market dips and keeps you focused on the long-term goal. Without this internal stop, it is possible to get sucked into high-risk pyramid schemes or investments that you don’t understand and end up losing money or not being able to access your money when you need it.
- Save like a squirrel – While the process of investing continues to evolve as new products, sectors and avenues open up, the fundamentals remain unchanged. Everything starts with developing a personal saving culture. “Starting to save too late or backing your own business as your retirement plan are common pitfalls,” says Palmer. “Too often we have seen this go wrong and people are left with no business and no retirement provisions.”
- Maintain your safety net – Yes, insurance products such as disability, critical illness or life cover are grudge purchases but adequate and appropriate protection is vital when you need it. As such, a financial safety net should form part of your personal risk mitigation strategy.
- Play the field – Ensuring you have a diversified portfolio, which spans geographies, currencies and asset classes, is central to ensuring that your wealth can weather any market condition. Ideally you want a combination of holdings that complement one another; smoothing out the volatility during tough times. The building blocks with which Carrick Wealth works range from bonds and cash to structured notes, property and equity. “We believe that a blended approach gives the best outcome,” says Palmer. “The key is to have a nimble portfolio manager who can transition between an active and passive approach, as well as between asset classes, currencies and geographies when needed. Another common mistake we see is investors being too aligned with one asset manager, one investment style and one house view. The diversification benefits of multi management improves the overall risk metrics of an investment strategy which is where you want to be – equal or lower risk with higher return. It is important to remember that it is not just a good return that is important but how that return is achieved.
- Partner with a professional – The single most important step you can make to help minimise investment risk is to partner with an investment professional who can capitalise on market movements and can find opportunities.