What is Investment Risk?
In designing a suitable strategy it is essential to take into account the difference between “absolute risk” and “relative risk”. An example of absolute risk is that the risk of investing in overseas stock markets will be higher than investing in the UK stock market due to the additional effects of exchange rate movements, known as ‘currency risk’. Similarly investing in UK bonds (fixed interest securities) will carry less absolute risk than investing in UK equities. Cash deposits in turn carry less absolute risk than bonds.
However investing in equities (whether UK or overseas) over longer periods such as ten years, carries considerably less relative risk than investing in equities over, say, a two year period. This is because the longer the investment timescale the less will be the effects of short term fluctuations in relation to the ultimate value of the investment.
Indeed it can be convincingly argued that investing in equities over long periods actually carries less relative risk than apparently lower risk investments such as bonds or cash. History shows that the relative spending power derived from an investment in cash or bonds diminishes over long time periods relative to equities and this is highly likely to continue in the future. The higher growth able to be achieved from the extra absolute risk is known as the “risk premium” and controlling this to your benefit is an important aspect of our approach to investment management.
Together with your other professional advisers, we can establish the most likely investment time scales while also assessing your need for access to capital sums and the level to which you are likely to need a regular income.