It's Week 45 and I've sent a lot of information your way since the year began. But of all the stats you've received from me, this chart is by far the most important. Why? Because it speaks of the current and future challenge for investors looking to generate returns in a low growth, low interest rate environment. Risk -a critical consideration when investing, is often overlooked. But this chart is a can't-miss. As indicated, investors must take on significantly more risk for the same desired return. 300% more to be precise. The alternative is to accept a lower potential return, recognizing that higher yielding investments experience greater volatility within any given year.
Investors must be able to stay with their investment allocation through challenging markets and full market cycles. Trying to time when to move in and out of the market has been shown to be a spectacularly ineffective way to invest. Invariably investors end up selling lower and buying higher, basing their investment decisions on emotions rather than economic fundamentals.
I use a turn of phrase when discussing your investment portfolio: "Know Your Money". Every time I say that, I'm going to add: "Know Your Risk." Determining whether your investment portfolio is performing to your expectations, we need to look not only at returns, but risk-adjusted returns. It's been 8 years since and meaningful market correction. One is coming, and Knowing Your Risk is critical to weathering the volatility that market downturns bring.
We are confident in our portfolio allocations, with their emphasis on lower risk government and investment grade corporate bond funds. Together, they lower risk while positioning clients for interest returns, even when capital gains are nowhere to be found.