Risk vs reward

A key role we have as advisers is to decipher how much risk our clients are willing to take. As a general rule of thumb the higher the risk the higher the potential return but the greater the fall when markets drop. In recent months we have seen the FTSE 100 fall from just above 7,400 on 14th Feb 2020 and although since then it has been lower it opened today (15/06/2020) at just over 6,100. So what effect does that have on your investments?

Investments tracking the FTSE 100 have dropped by over 13% in the last 6 months* and its annual performance also shows currently a drop of over 13%**. We would consider that someone wanting to invest in this type of fund should be willing to take quite a high risk, not just because of the type of investment but also because it only represents one sector of the markets. Other sectors have reacted differently, with some even having a slight positive return over the same time period. This is why we feel it is important to hold diversified portfolios, with funds representing a combination of sectors.

So how have our clients’ portfolios fared? Well, we run 5 main portfolios with a risk rating of Cautious to Adventurous. I have been pleased with the way they have fared. Whilst a few have a slight drop over a 6 month*** period all of them are showing a positive annual return**** (before charges), even though these are minimal. This is because they are diversified into a number of different types of fund, so the drop and impact has been cushioned.

However the most important aspect in our clients’ financial plans has always been to have a contingency plan: to include a reserve held in savings, or emergency fund, to tide them through situations like this, until we know whether values will recover. Understanding the level of investment risk is important and we would always recommend you seek independent financial advice to make sure you are fully aware of that risk before investing any funds.

Contact us if you would like to review your investments and risk profile

*L&G UK 100 Index Trust C acc 6 month period ending 15th June 2020
**L&G UK 100 Index Trust C acc 12 month period ending 15th June 2020
***6 month period ending 15th June 2020
****12 month period ending 15th June 2020

Past performance is not a guide to future performance, nor a reliable indicator of future results or performance.  The value of investments, and the income or capital entitlement which may derive from them, if any, may go down as well as up and is not guaranteed; therefore investors may not get back the amount originally invested.

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