The final post in the series about accelerating your progress to build wealth.
Harnessing Risk
I’m on potentially sticky ground here by even suggesting that it might make sense to take more risk than you need to in order to achieve your goals. As an adviser, I have to be even more careful. My regulator wants to know that I have assessed my client attitude to risk – not an easy task in itself – and then have recommended solutions according to that recorded attitude to risk.
If I were to suggest that a client could achieve their goals by accepting a higher level of risk, I’d likely be censured. Risk is something to get to know really well as an investor and wealth-builder. With familiarity comes understanding, and with understanding comes an acceptance of the true nature of risk.
For the novice investor, I’d argue that the biggest risk of all is the risk that they will make bad decisions at the wrong time for their portfolio. More experienced wealth-builders should have a better understanding not only of how investments work in good times and bad, but also a better understanding of themselves.
If you take a risk questionnaire and come out with a balanced attitude to risk, that would normally suggest an equity holding of no more than 60% of the total weight of your portfolio. I refer to ‘risk-flex’ – depending on your timescale, you might push the risk up a notch or two. But for longer timescales, I actually think there is an argument for going all-out.
Remember that no-one loses money on the stock market if they a) spread their money around and b) don’t sell when their shares are worth less than they bought them for. With that in mind, and if you can cope with a potentially very rocky ride, it makes sense to invest 100% in equities. By a rocky ride, I mean the potential for the value of your investments to halve. If you’re not comfortable with that, then dilute your shares with other assets.
The thing about harnessing risk is that you’re depending on something completely unknowable and unmanageable to build your wealth for you. And that might be too uncomfortable for you to go all-in on.
If your goal is a cash event – you want to spend an amount of money at a given point in the future, you’re going to need to convert assets into spendable money as you approach the target date. The last thing you need is to find your money has reduced due to a market event, right then you need it. Long term, take the risk; short term, don’t do it, no matter how tempting it might be. Be prepared, though, to harness risk to accelerate progress.
Did you miss part three in this series? Or, click here to learn about leverage.
Leave a Reply