16 August 2016

Carbon’s first investment principle

Carbon’s first investment principle: take the minimum risk necessary to achieve your target return.

In the early hours after the Brexit vote markets plummeted and investors were understandably very uncomfortable. However, within a short period of time stock markets had recovered and, indeed, at the time of writing, the FTSE100 is pushing up towards a high point. The gyrations in markets (and of course the newspapers focused on the sensational falls and not on the subsequent recovery) may, however, have caused some investors to consider if they were taking more investment risk than they were comfortable with.

Risk and return are related, and the higher the return you seek, the more risk you should expect to be exposed to. In the case of Brexit, the greater the proportion of your investments that were held in UK-listed companies specifically, as opposed to safer investments like bonds and cash, the more your portfolio would have bounced around in value in the hours and days after the Brexit vote.

Brexit might be a one-off event in UK politics, but it is just one of a huge range of factors that impact on investment values every day. Stock markets are always uncertain, especially in the short term, but in the long term they tend to return more to investors, which they have to of course, otherwise investors would simply leave their money in the bank.

So how much risk should you take? Our view, and certainly our starting point, is the minimum risk required to meet your objectives. Do you need to secure a high return and therefore take a high level of risk to allow you to retire comfortably at age 55, or to help the children on the property ladder? At the other extreme, could you leave it all in the bank? Or would ‘playing safe’ by leaving it in the bank for 20 years actually mean risking not meeting your objectives?

The less risk you are able to take to meet your objectives, the more certain the expected return, and therefore the more likely you are to meet your objectives. Brexit hasn’t changed this principle, but it may be a prompt for investors to consider whether the amount of risk they are taking is the right amount of risk required to achieve their goals.

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