Q. With the current stock market volatility, where do you recommend I invest my money? I am looking for capital growth over a 10 year period. Should I avoid equities/shares altogether? I’m familiar with investing in equities and have 2 personal pensions where I invest the money in managed funds.
A. I’ll try and answer this in 2 steps.
Firstly, you need to know what your risk attitude is. One key metric is: how much fall in the value of your investments could you tolerate? Let’s say that you could cope with a 20% fall at any time. This would indicate, for example, that you could invest in an investment portfolio that has a 60% equity component.
Note that I said portfolio, not fund. Many investors simply have a collection of investment funds, not a well devised investment portfolio. It is a KEY distinction that most are not aware of (but you are now!).
The second step is that you MUST know how much risk you can expose your money to and what percentage your portfolio can fall in value without it affecting the achievement of your long term goals. This is known as risk capacity. For example, if you can only bear a 10% fall in any year, a 60% equity portfolio may not be the best for you as the figures indicate that this type of portfolio could fall more than 10% in any given year.
How do you know what percentage fall you can bear without it affecting your goals? The only way you can do this (at least, that we are aware of) is to compile a comprehensive financial plan and MEASURE what percentage you need your money to grow by. Without this measurement you’ll be simply guessing (you may even find that you can REDUCE the amount of risk you were going to take and still achieve your goals).
Lastly, the equity component of any portfolio will fluctuate in value, however as you are investing over 10 years this time period should be long enough to ride out the falls that will inevitably happen. Remember, the value of your investments can fall as well as rise and past performance is not a guide to future performance.
