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Invest Blue is passionate about helping people reach their goals and dreams by providing quality, tailored financial advice.

Belief 2: Risk and return

We believe that both components of performance, risk and return, are equally important considerations when determining a Wealth Management strategy that can meet your goals and maximise the probability of living your best possible life.

What is tolerance to risk?

Risk tolerance is the amount of variability in investment returns that you are willing to withstand within the investments in your Wealth Management strategy. Risk tolerance is an important element of any Wealth Management strategy. You should have a realistic understanding of your ability and willingness to “stomach swings” in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time, whereas if you don’t take on enough risk, you may not achieve the growth required from your portfolio to meet your goals.

Age is often a significant contributor to your personal risk tolerance, though it is not the only defining factor. Generally speaking, people who are younger and have a longer time horizon to invest, are often able to (and often encouraged to) take on greater risk, than older people with a shorter-term horizon. In addition to age, current net worth (consideration of assets and liabilities), as well as your opportunity to earn and save, must be considered.

We believe in making sure our clients are exposed to the right amount of risk, based on their personal situation. Investors want ‘return on their investment’, however, to seek a return to meet your goals, you have to take on an element of risk. This trade-off is an import discussion in any wealth-building exercise. Understanding this relationship is the foundation of any wealth-building approach and your Invest Blue Financial Planner will provide and guide you through the tools and resources, to help you make an informed decision together.

 

The trade-off between risk and return

We understand that for most people, risk isn’t a theoretical variance from a random benchmark, but is far more practical and can take on many forms. It could be; the risk of losing your hard-earned money and consequently not achieving your goals, the frequency of rises and falls in the market, investing (or making poor decisions) at the wrong time, or, choosing an investment you don’t understand.

Regardless of the form risk comes in for you, in order to manage some or all of these risks, we believe that taking an active approach to risk management is critical, in order to maximise the chances of achieving your goals and objectives, so that ultimately you are able to live your best possible life.  As such, we believe that it is just as important to focus on the risks to your Wealth Management strategy, as it is to focus on returns.

Another reason why we focus on risk minimisation, is because recovering (while still allowing your funds to grow) from a financial loss, requires a significantly greater gain to recover your funds. For example, if your portfolio were to lose 50% of its value, it would take double that in returns (100%) to recover the lost value.

Market Cycle

Another key component to understanding risk and return is to understand what is referred to as the “market cycle”.

When it comes to markets and valuations, it is important to note that they are as many social institutions as they are products of facts and figures. Essentially markets operate in two modes: fear and greed. Market prices increase when demand does. We often see cycles where the price for certain investments increases purely because the demand has increased – investors see others investing in it and the price goes up, therefore they believe it is a good investment and buy-in as well: greed. If something happens to unsettle the demand, values can fall, it creates uncertainty and the selling can intensify. The share price goes down: fear. This is the emotional product of investing and why we recommend separating investment selection from personal emotion and putting it in the hands of an objective and skilled fund manager.

Warren Buffet, a renowned and successful investor is famous for quoting that you should be “fearful when others are greedy, and greedy when others are fearful.”

Understanding your risk tolerance – your risk profile

Risk tolerance is a combination of your personal preferences, objectives, and investment horizon; that is the timeframe you have available to achieve your goals.

Once we have determined the appropriate level of risk, our objective is to achieve a consistent return throughout the investment cycle within the level of risk being taken.

For each significant goal, it is important to understand what your timeframe is. If you have a short time frame, your risk profile should be low. If you have a long time frame, your risk profile can be higher.

What is your timeframe?

<12 months 12-24 months 2-3 years 3-5 years 5-7 years >7 years

Understanding risk vs. return

The difference between long-term averages and returns

For any given investment portfolio, the longer frame of time you view the more accurate you can estimate the return. That is because you are taking performance and averaging it out over time. In any one year, however, the actual return could be above or below the average. This means that even the best investments will have ‘bad’ years. But when invested over the long-term, there will also be good years.

Summary of profiles

0% growth risk profile

About you: Protection of capital or certainty of income is your only objective. You do not wish to attain higher returns if your capital is at risk.

The approach: As a very conservative investor we allocate between 0% and 15% of your portfolio to growth assets. Your investment benchmark is the RBA cash rate. There is no recommended minimum timeframe for an investment strategy aligned to this risk profile.

Projected annual return of 2.75%.

Normal return ranges of 2.25% to 3.25%.

Extreme return ranges of 1.25% to 4.25%.

This is not a guarantee that you will achieve this return.

Approximately 66% of annual results are expected to fall in this range. Approximately 99% of annual results are expected to fall in this range.

30% growth risk profile

About you: You are a defensive investor. You are willing to consider less risky assets; mainly cash only and some fixed interest investments. You are prepared to accept lower returns to protect the value of your capital.

The approach: As a conservative investor we allocate between 15% and 45% of your portfolio to growth assets. Your investment benchmark is CPI +1%. There is a recommended minimum timeframe of 2 years for an investment strategy aligned to this risk profile.

Projected annual return of 4.05%.

Normal return ranges of 0.11% to 8.21%.

Extreme return ranges of -7.99% to 16.31%.

This is not a guarantee that you will achieve this return.

Approximately 66% of annual results are expected to fall in this range. Approximately 99% of annual results are expected to fall in this range.

50% growth risk profile

About you: You are an investor seeking a combination of income and growth from your investment portfolio. Generally, you are willing to chase medium to long-term goals while accepting the risk of short to medium-term negative returns. Your investment mix is likely to include an equal mix of the defensive assets and growth assets such as equities and property.

The approach: As a moderate investor we allocate between 35% and 65% of your portfolio to growth assets. Your investment benchmark is CPI +2%. There is a recommended minimum timeframe of 4 years for an investment strategy aligned to this risk profile.

Projected annual return of 5.00%.

Normal return ranges of -0.94% to 11.32%.

Extreme return ranges of -13.20% to 23.58%.

This is not a guarantee that you will achieve this return.

Approximately 66% of annual results are expected to fall in this range. Approximately 99% of annual results are expected to fall in this range.

70% growth risk profile

About you: You are a growth investor. You are willing to consider assets with higher volatility in the short-term (such as equities and property) to achieve capital growth over the medium to longer term. Your investment mix will comprise a greater share of growth assets.

The approach: As a moderate investor we allocate between 55% and 85% of your portfolio to growth assets. Your investment benchmark is CPI +3%. There is a recommended minimum timeframe of 5 years for an investment strategy aligned to this risk profile.

Projected annual return of 5.97%.

Normal return ranges of -2.19% to 14.55%.

Extreme return ranges of -18.93% to 31.29%.

This is not a guarantee that you will achieve this return.

Approximately 66% of annual results are expected to fall in this range. Approximately 99% of annual results are expected to fall in this range.

85% growth risk profile

About you: You are a growth investor. Prepared to accept higher volatility in the short to medium term, your primary concern is to accumulate growth assets over the long term. Your investment mix will spread across a wide variety of asset sectors but will mainly consist of more aggressive investments.

The approach: As a moderate investor we allocate between 85% and 100% of your portfolio to growth assets. Your investment benchmark is CPI +3.75%. There is a recommended minimum timeframe of 6 years for an investment strategy aligned to this risk profile.

Projected annual return of 6.71%.         This is not a guarantee that you will achieve this return.

Normal return ranges of -3.19% to 17.21%. Approximately 66% of annual results are expected to fall in this range.

Extreme return ranges of -23.59% to 37.61%. Approximately 99% of annual results are expected to fall in this range.

100% growth risk profile

About you: Your primary objective is capital growth. You are an aggressive growth investor and are prepared to compromise your portfolio balance to pursue greater long-term returns. You are willing to accept higher levels of risk. Fluctuation in capital is acceptable in the short to medium term for the greater potential for wealth accumulation. With the exception of a minimal level of cash for liquidity purposes, your investment mix will only consist of growth assets such as international and domestic equities and property.

The approach: As a moderate investor we allocate between 85% and 100% of your portfolio to growth assets. Your investment benchmark is CPI +4.50%. There is a recommended minimum timeframe of 7 years for an investment strategy aligned to this risk profile.

Projected annual return of 7.43%.

Normal return ranges of -4.09% to 19.53%.

Extreme return ranges of -27.71% to 43.15%.

This is not a guarantee that you will achieve this return.

Approximately 66% of annual results are expected to fall in this range. Approximately 99% of annual results are expected to fall in this range.

Role of your adviser – understanding risk and return

Your adviser will work with you to help you understand the trade-offs between risk and return, and the potential impact that risks can have on the probability of you achieving your objectives and work with you to define your risk profile.

Your adviser will help you design a Wealth Management strategy that places equal importance on risk and return, and provide ongoing monitoring and support, to ensure your objectives are being met.

 

What’s your philosophy?

Managing risk is not important to you. You are more concerned with getting the highest return when markets are rising and accept that this may come with significant losses when markets are falling. You prefer this to achieve a consistent return throughout the market cycle. You are not prepared to pay for risk management. Managing risk is as important to you as achieving the highest return. You understand that this might mean lower returns when markets are rising in order to protect from losses when markets are falling. You would prefer to achieve a more consistent return throughout the market cycle Having an active approach to risk management is so important to me that I am prepared to pay higher investment management costs to manage my risk.
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