Getting it Right

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The first thing investors have to do is work out what they want from the investment. Basically, do they want income or growth? How long do they want the investment for? What is their risk/reward ratio (i.e. how much risk are they prepared to take for what they want)? This may be stating what Basil Fawlty calls the “bleeding obvious” but it is amazing to see how many investors expect high returns with almost no risk.

One of the main culprits for this situation is the hedge fund industry. Some of the managers seem to say that you can get quite extraordinary gains for practically no downside at all. This is blatantly not true. No financial institution can guarantee this 100% – Northern Rock and Icelandic banks spring to mind! Also, you only have to take a quick peek at how the hedge fund industry has done as a whole since 2008 to see that low returns are now the norm.

Some readers will wonder why I am doing this. What I am trying to do is make investors realise that it’s practically a given that if you want to achieve potentially higher returns than the bank offers (and please remember the aforementioned caveat) then you are going to have to take some risk. Yes, over the last few years it was possible to beat the bank with comparatively low risk by just buying certain bonds but most analysts now agree this time has passed and this method of investment is now considered to be quite a high risk.

Another thing that potential investors get confused about is the actual definition of “Risk”. From a fund manager’s point of view it is regarded as loss of capital and not the volatility of returns. It is time in the markets that allows the investor to see ups and downs of market volatility.

Obviously, it has to be understood that people have different time frames and expectations when it comes to investing. These range from people who just want to beat the back, to aggressive investors who expect to make at least 20% returns but are prepared to take on the appropriate risk to achieve this target. In a Utopian situation, investors would get great returns for low risk. Unfortunately, this is the real world and this just cannot happen. MitonOptimal, one of our favoured managers have a great phrase which is that ‘time in the market’ is much more important than ‘timing the market’. Basically, this means that the longer you stay in the market then the more chance you have of achieving your aims.

You also have to trust your fund manager. Any good one will do lots of quantitative analysis which will allow them to then strategically allocate the right weighting so as to obtain the targeted returns. This will be done by taking into account such things as diversification, underlying volatility and historical performance.

Therefore, to conclude, if you allow yourself as much time as possible you will have a greater chance of getting what you want out of the markets. Unfortunately, none of us has a crystal ball. The less time you spend in the marketplace then more chance you have of losing money. As MitonOptimal say, “In order for targeted returns to be achieved consistently over the appropriate time-frame, the two key ingredients required are well informed investors who are clear on how their investment is likely to perform over time, and a robust investment process geared to delivering those returns.” I could not have put it better myself!

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]