Finding the right portfolio for you | Burton & Fisher

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.

Complete the psychometric risk profiling questionnaire. The questionnaire was developed with industry-leading pschometric consultancy, Oxford Risk, a company led by academics from the University of Oxford.

Dynamic Planner then automatically checks the consistency of the responses and identifies answers outside the expected range, which we can discuss together.

You then complete a few additional questions relating to your investment timeframe, capacity to tolerate possible losses and liquidity requirements.

The selected risk profile gives a number between 1 and 10 to better understand how comfortable you would be with the possibility of weathering losses and investing in higher risk investments. From this we map likely portfolio asset allocation and are able to share an indication of the expected range of returns over 12 months.

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.

Market Risk

This is the risk that your investments will fall in value. The value of shares and bonds changes each day, but at turbulent times for markets higher-risk investments can fall substantially in a short period of time.

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.

Shortfall Risk

This is the risk that the value of your investments will not rise sufficiently to reach your ultimate goals. For example, that during your working life they do not rise sufficiently to deliver the pension pot you require to fund your retirement.

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.

Sequencing Risk

Early losses that take place in the first few years of a decumulation programme can have a much greater impact on total returns, than losses that occur later. This is known as “sequencing risk”.

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.

Inflation Risk

This is the risk that the cost of living – measured by inflation – rises faster than the value of your investments. Whilst the absolute value of the portfolio may have increased in this scenario the real value of your portfolio would have fallen.

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.

Liquidity Risk

This is the risk that you own an investment for which there is not a ready market, and in the event that you want to sell it you are unable to, either entirely, or without accepting a lower price for the investment.

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.

Opportunity Cost Risk

This is the risk that you choose to make an investment that is inferior to another investment.

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.

Institutional Risk

This is the risk that the provider of an investment instrument or product goes bankrupt.

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.

Exchange Rate Risk

This is the risk that an investor is invested in a currency that changes in value relative to the value of their base currency.

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.

Buying a share – or an equity - in a company gives an investor a share in the ownership of a company. Ultimately this entitles the investor to a portion of the company’s profits either through the return of money in the form of dividends or the rise in the company’s share price as it grows. Ultimately it is shares that have the longest track-record of delivering inflation-beating returns. However, investing in shares comes with significant risk. Should the company go bankrupt the individual could lose everything. Shares range from those offered by the largest companies in the world through to small businesses that are not yet delivering a profit. They can be bought and sold each day on stock exchanges such as the London Stock Exchange and investors can track their performance through examining stock market indices, such as the FTSE 100.

How to control the risk of investing in shares

Burton and Fisher portfolios invest with fund managers who invest in a broad range of shares across the world. This diversification means that no individual company will determine the overall success of the portfolio. It is important for a portfolio to always be properly diversified across different markets and market sectors. Fund managers buying shares have a variety of different criteria which tend to perform at different times in the market cycle. Key tactics involve ‘value’ investing – which seeks to own companies that are worth more than their current share price and ‘quality’ investing – which seeks those companies with the most proven ability to deliver against their objectives over the long-term. Your portfolio will blend these styles in order to achieve consistent returns.

Bonds

Bonds are debt issued by companies or governments that pay a fixed rate of interest ahead of being re-paid at a future date. This asset class includes UK bonds (known as gilts) issued by the British government and US Treasury bills issued by the US government. The government must re-pay the loan unless it defaults. Similarly, a bond issued by a company is dependent on the solvency of that company. Bonds are given ratings by credit agencies to determine how safe they are. However, unlike a mortgage or car loan these bonds can be bought and sold each day. The price of these bonds changes based upon a wide variety of factors including changes in interest rates and the market’s view on the creditworthiness of the company.