Risk labels have become meaningless and may mislead the ordinary investor, according to digital wealth manager Scalable Capital.
One in five British investors do not know the potential level of loss that they could experience in a “cautious”, “balanced” or “aggressive” portfolio, and fund values can often fall a lot more than they expect.
71 per cent of investors thought that a “balanced” portfolio should not fall more than 20 per cent in a bad year. In reality, its 10-year data shows that the worst-performing “balanced” fund would have lost 43 per cent had an investor entered the market at the peak and sold at the bottom.
The worst defensive portfolio would have lost almost 37 per cent of its value over the last ten years, However, 70 per cent of investors don’t expect to lose more than 10 per cent in a bad year.
Analysis by Scalable Capital has also found that the actual level of risk among funds grouped in the same descriptive risk category can vary significantly, so not only do investors interpret descriptive risk categories differently, but the actual level of risk of the funds in which they invest can vary.
More often than not, investors unknowingly take more risk than they are prepared for.
Scalable Capital chief executive Adam French says: “If investors don’t understand or over- or underestimate the risk of their portfolio, they may be in for a rough ride when the markets fluctuate. Our research shows that investors tend to sell their portfolios too quickly when the going gets rough.”
Of the 2,000 investors that took part in the survey, 76 per cent said they manage their savings and investments themselves,