Long-term wealth accumulation and retirement saving must be considered no matter what age you are. However, we must first consider three of the major risks which have the ability to destroy your chances of building your desired levels of long term wealth should they not be addressed.
The term risk is something we hear in the industry in a number of areas and discussions but is often not clearly defined. Also, it is often used in a number of different contexts and can mean a number of things.
Often when speaking about risk we refer to this as being stock volatility however risk can be associated with a range of terms and discussions of all asset classes. We refer to three main types of risk when considering long term wealth accumulation goals and objectives with clients. We aim to provide you with a clear understanding of each of these.
Retirement wealth for many will come in the form of superannuation however many clients often have other investments in a wide variety of structures and products. One risk which many of us will more than likely be exposed to some degree is business risk – an umbrella term for company-specific factors that could cause losses which cannot be reversed, even in the long term. This can be seen in several ways however the most common is a company’s financial strength and its balance sheet. Often this comes in the form of large corporations holding significant levels of debt on their balance sheets.
In the finance world, we refer to business risk in a number of measures whether it be earnings capacity, leverage of the company, cash flow or many others. Ensuring your portfolio encapsulates good quality businesses and fund managers is essential to the overall long-term growth and prosperity of your wealth accumulation strategy. Many people can become undone due to the risk levels as part of their portfolio.
Sophisticated investors know business risk is pretty straightforward and you won’t see informed investors making informed decisions on less than ideal businesses. When we consider portfolio risk, we are speaking about inadequate diversification within a portfolio. The saying ‘you should never put all your eggs in one basket’ stands true and is one way to highlight the importance of diversification. Having a variety or mix of businesses, sectors, economies and fund managers can help to reduce portfolio risk. Investor theories nearly all involve the proposal of holding between 10-20 high quality, undervalued companies as part of any stock portfolio. In addition, further diversification across up to 5 individual asset classes is prudent for additional instigation against portfolio risk.
The last of the three risks we are highlighting is psychological risk. Our cognitive biases have been studied by many over the years and yet investors continue to make decisions which are either outside the norm of the market or go against investment strategies. Having these cognitive biases can affect the decision making process and lead to either buying the wrong stocks (or investments altogether) or making negative timing decisions.
We tailor our portfolios and investments to the individual investor. By doing so we are able to develop a personalised investment solution to meet client’s investment goals. Should you wish to speak with one of our financial adviser’s contact us on (07) 3284 7875 to arrange an appointment.
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