Reframing investment risk

There’s no getting around it: all investing involves risk, and equity investing in particular.  But is investment risk really something to be frightened of? Joe Wiggins is an expert in behavioural finance. As Joe explains, it’s all about how risk is framed.  A video on the Bloomsbury Wealth YouTube Channel.

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Transcript: Robin Powell & Joe Wiggins/ Behavioural finance expert

RP: There’s no getting around it: all investing involves risk, and equity investing in particular.  But is investment risk really something to be frightened of? Joe Wiggins is an expert in behavioural finance. As Joe explains, it’s all about how risk is framed.

JW: There’s no getting round it: all investing involves risk, and equity investing in particular.  But is investment risk really something to be frightened of?  Joe Wiggins is an expert in behavioural finance. As Joe explains, it’s all about how risk is framed.

RP: In other words, it’s our ability to withstand short-term volatility that gives us long-term rewards.  If you have a globally diversified equity portfolio, it’s very unlikely, in the long run, that you’ll suffer a substantial loss of capital.

JW: The best way I conceptualise investment risk is to think of it as not being about volatility or drawdowns, but about it being the chance that we fail to meet our long-run outcomes.  So we’ve got certain objectives in the future, 10 years in the future. What are the chances to the decisions we make now with our investments mean that we fall short of meeting those objectives. So that can reframe the. So we’re not thinking about the short-term volatility of investing in equities, but we’re thinking about the chance that I won’t be meeting the goals that I have for my future self in 20 or 30 years time. So risk is about failing to meet those goals.

RP: Volatility, corrections and bear markets can be painful. But they’re also inevitable.  The secret is to stay focused, when they happen, on your long-term goals.

JW: The key thing for considering poor short-term performance is what are the implications for long-run returns for our long-run objectives?  So, for example, through 2022, we saw a significant rise in bond yields from incredibly low levels. And whilst that brings about short-term pain, if we reframe it and think about the long-term consequences of that, it means that we’re now investing money into bonds that are offering significantly higher returns than before, so that the valuations have improved.  The chances of generating good returns from those bond investments over the long run have improved, so we need to think about it.  Think about short-term market movements in the context of what our long-run objectives are.

RP: In short, don’t confuse risk with volatility.  The real risk, if you keep reacting to volatile markets, is that you’ll fail to generate the long-term returns you need.

Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.