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Thank goodness for risk

Daniel Lane

Daniel Lane - Fidelity Personal Investing

It’s been a choppy week in the markets to say the least. A prime ministerial resignation in Italy, more uncertainty over US interest rate cuts and yet more Brexit talks have had investors shifting uncomfortably in their seats.

None

How do I know this? Because, further to the headlines and share tickers, it’s all my family, friends and colleagues want to tell me. And the initial confessionals are followed by the same questions: “What’s going to happen next and how can I protect my portfolio?”

Reasonable questions entirely, and what they’re really looking for is a swift bullet point answer. But, of course, it isn’t that simple.

None of us know what is going to happen with any degree of accuracy - a sudden presidential enquiry into the possibility of buying Greenland should be evidence enough for that. But scratch the surface and what’s really on our minds is the fear of risk that such an uncertain climate brings.

The longest bull market in history has lulled a lot of us into believing markets only go one way - anything else is cause for concern. Risk and volatility have become concepts to avoid at all cost and it’s just not helpful.

My colleague Emma-Lou Montgomery put it simply to me yesterday: “You can’t get rid of risk, and you wouldn’t want to because the other side of the coin is reward.” We’ve been happy enough to accept some huge share price rises over the past 10 years, so we should be pragmatic at short-term fluctuations the other way. The market allows shares to outperform their intrinsic value and a function of that is allowing underperformance as well - now more than ever we need to recognise this and accept it.

There is always the chance that things don’t work out the way we’ve expected them to, but this week has also shown why that can be positive too. Interest in Greene King from Li Ka-shing, Hong Kong’s richest man, lifted the shares by 50%, and today’s news that Hasbro plans to acquire Entertainment One has seen shares in the Peppa pig-owner jump 32% at the time of writing.

We could get into technical risk measures like Sharpe and information ratios and they clearly have their place, but as personal investors, our relationship with risk and volatility needs to be a founding principle of our investment journey from the get go.

If we aren’t comfortable seeing the value of our portfolios swing during weeks like this one, that’s more than fine but we need to have that reflected in the type of assets we hold.

This means combining a diverse mix of assets in proportions that match your particular appetite for risk long before any market volatility arises.

Your attitude to risk is likely to change through the course of your life and that will mean shifting your exposure to equities, bonds and other assets to balance that risk-reward ratio. But these are changes for the long-term, not to assuage short-term fear or to attempt to get rid of fleeting nerves.

As you can imagine, my conversations haven’t been nearly as cathartic as my family and friends would have liked but the reality is that we should be looking to the overall blend of our assets rather than individual holdings in times like these. That way, we don’t need to ask what will happen next.

Players of our Fantasy Share Picking Game will be particularly interested in riding out volatility. Short-term ups and downs might even give them the chance to grab a few bargains. If you haven’t signed up yet, have a look at the page along with commentary from our investment director Tom Stevenson.

More on our Fantasy Share Picking Game

Five year performance

(%)
As at 23 Aug
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Greene King 6.0 3.6 -15.5 -21.6 84.0
Entertainment One -13.0 -5.8 -4.8 54.6 22.4

Past performance is not a reliable indicator of future returns

Source: FE, as at 23.8.19, in local currency terms with income reinvested 

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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