Investment Diversification, the Role of Risk Profiling and the Importance of Advice
26/11/2015 Shane Light, Head of Advice/Senior Financial Planner
For the average investor, a short term, sharp decline in the markets and increased volatility can be enough for them to re-engage with their financial adviser and seek advice on moving out of growth assets and into defensive assets. Often, the most common reaction from clients is a desire to liquidate their investments and set aside funds from the sell-off in cash.
While a client’s appetite for risk is assessed through a completed risk profile, before they invest their money, time after time we see the psychology of a client change during a decline in the markets and economy.
What is a Risk Profile and how Does it Work?
A risk profile is an industry standard tool, which varies between Australian Financial Services Licensees, and is designed to identify the amount of risk an investor is willing to accept. Assessing a person’s tolerance to investment risk is a key aspect of portfolio construction and is critical to determining appropriate asset allocation, the recommended investments and expected returns.
Psychology and Emotion
As financial planners we are not experts in psychology, however as subject matter experts in managing clients’ money, through both negative and positive times, we encourage our clients to detach emotionally. We do this by revisiting the client’s original appetite for risk in conjunction with their goals and objectives, i.e. re-visit the client’s journey, why they initially sought advice and what they set out to achieve.
We encourage clients to invest their money in line with their investment time frame into a diversified portfolio of strongly recommended and researched assets. Reacting to market events and attempting to “time the market” is something we do not encourage.
Instead of making short-term decisions about your investments, a better idea may be to develop and maintain a long-term investment strategy in conjunction with goals and objectives with your adviser. It has been proven through history that kneejerk reactions to sell down underperforming assets may be ill-timed. For example, in 2007 when the global financial crisis started to unfold, the ASX all ordinaries market was at an all-time high of 6,748.90 (October 12th 2007). In March 2009 the market was at its lowest point of 3,145.50 before rebounding in March 2015 where it rose to 5,975.50. Today the market is sitting around 5000 points – sure, it’s not back to its 2007 peak but you’d be kicking yourself now if you’d become impatient and sold at the low in 2009.
If your fund continues to re-invest at lower levels during market down turns, you will be rewarded when the market recovers.
In light of market volatility, I believe clients who seek and pay for ongoing personal advice will be better placed over the long term. Ensuring your portfolio includes an array of different asset classes through diversification is an important strategy to smooth returns over a long investment time frame. Markets will always trade with some level of volatility, but taking this approach helps even out the highs and lows over time.
If you are interested in developing your portfolio and have never sought financial planning advice before, we encourage you to contact the team on 1300 726 132, to make a financial planning appointment. Initial consultations are free and with no obligation. Alternatively, if you are an existing client looking for additional value add advice, please also do not hesitate to contact us to discuss your current situation and future financial plans.
Disclaimer: Shane Light is an Authorised Representative and John Hopkins Financial Services Pty Ltd is a Corporate Representative of WealthSure Financial Services Pty Ltd Level 1 190 Stirling Street PERTH WA 6000 ACN:130 288 578 AFSL: 326450.
General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.
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