Every investment that seeks to grow faster than inflation - the cost of living - carries risk. It is vital for your financial adviser to fully understand both your attitude to taking risk and your capacity to suffer losses during the lifetime of your investment.
It is this decision about how much risk to take that will have the greatest bearing on the return of your portfolio. Once we understand the level of risk to take, our role is then to build portfolios that always remain consistent with this risk level.
How We Determine Your Appetite For Risk
Everyone has a different attitude to risk. This is often linked to our life experience, our future plans and the values and approach we take to life. Your Burton and Fisher financial advisers will not just simply need to understand how much financial loss you can bear – your ‘capacity’ for loss – they must also understand how you feel about the risk you are taking. This ensures that your goals can be achieved but that you can remain comfortable throughout the lifetime of your investment, both in the good times and the hard times.
What Is Risk?
Burton and Fisher utilise cutting edge psychometric risk profiling methodology, produced in conjunction with leading academics from the International Capital Market Association Centre at Henley Business School to incorporate the latest research and psychometric thinking into the research that we produce. This ensures that an individual’s risk profile and recommended portfolio is suitable for their requirements.
An accurate risk profile helps us to build long, deep relationships with our clients and is paramount to ensuring that financial goals and targets are met effectively. Accurate risk profiling also means that in a market downturn clients are more likely to be comfortable with any short-term fall in the value of their portfolios.
To fully understand the level of risk to take with an investment portfolio your financial adviser must carefully balance a number of different types of risk.
How to understand this risk: A diversified portfolio of investments will still rise or fall in value over time. Those investors who require access to their money in the short-term may find this risk intolerable. Others may be willing to ride out the ups and down in the short to medium-term in order to achieve their long-term goals.
How to understand this risk: Whilst market risk can be painful in the short-term, a failure to accept an appropriate level of volatility could mean that an investor’s ultimate goal is not met.
How to understand this risk: Large losses in the early years can adversely affect returns. Consideration of “phasing in” of initial the investment may be looked at in order to reduce this risk.
How to understand this risk: It is vital to understand how much your investment is growing above and beyond the cost of living to ensure that it is making a real return.
How to understand this risk: Burton and Fisher’s portfolios only invest in open-ended funds that can be bought and sold each day. However, in extreme circumstances these funds can be suspended so extensive due diligence is needed to avoid this risk on each underlying investment. An example of this is a property fund. During the period following the EU referendum (June to September 2016) several property fund managers applied ‘fair value adjustments’ to the property values in the fund. The fair value adjustments marked down the value of the properties to reflect what the manager believed to be fair value of the properties until the valuation agent regained confidence in the property valuations.
How to understand this risk: Burton and Fisher portfolios scrutinise the entire universe of potential funds in which to invest, carefully analysing the performance they have achieved in order to offer our investors the best chance of finding the most compelling opportunities.
How to understand this risk: Burton and Fisher portfolios only invest in regulated open-ended investment funds and/or unit trusts. The assets in these funds are always kept separate from those of the product provider and are governed by strict rules. These funds also restrict the amount that can be invested in the shares or bonds of any one company. In addition to this we have strict limits on how much can be invested with an individual investment house.
How to understand this risk: Investing internationally offers the potential for reward, however the exchange rate risk in your portfolio is constantly monitored to determine the impact this will have on the overall performance of a portfolio.
Sources Of Risk And Reward
Global financial markets offer a dizzying array of investment options. However, markets are built on the two key building blocks of shares and bonds (also known as fixed income). These instruments provide a way for companies and governments to offer investors a flow of cash in return for allocating their capital to them.