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Risk labels ‘meaningless’ to ordinary investors

House-Dice-Coin-Symbolising-Risk-in-Mortgage-Market-700.jpgRisk 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, 

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. No surprise here. I’m guessing the same level of confusion would arise if you did the same survey across advisers. Not because they don’t understand risk much better but because there are no ‘standards’ when it comes to risk labelling.

    What’s in a name? Turns out not a lot in all walks of life…

  2. Nicholas Pleasure 19th October 2017 at 9:33 am

    …on the other hand, clients don’t like it either if the stockmarket is going up by 10% and their fund does 4%!

    Our job as advisers is to educate clients as to what to expect and to help them choose a risk level with which they are actually comfortable. That’s what we do.

    A good number of “ordinary investors” will be those making their own decisions on platforms like HL.

    This shows the value of good advice.

  3. A balanced portfolio should not fall more than 20% in a bad year. Taking the worst possible period from the worst performing fund during one of the worst recessions ever does not provide evidence to the contrary.

  4. Why leave it at risk ?

    Most of the crap we leave or discuss with the average investor is meaningless….lets be honest here.

    We discuss we seek clarification and understanding……. then its… what about that rugby game at the weekend. or cant wait to buy some new stuff with the money I am going to make on this.

    Whats the saying ? in one ear and out the next and as for disclosure documents and suitability reports…. oh darling we have just got some stuff from …. ok lets look at it later when we have a spare 5 mins….

    • DH – you’re overlooking the value of a good digestive and cup of coffee

      • Dave you are not wrong….. also with the amount of visits and time spent on my clients settee’s explaining, discussing presenting point of sale docs …then doing it all again just to make sure they have a grasp of things… most of them charge me rent ! as well as keep me watered and fed.

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