Managing risk
Above: John Kennett
For more than 10 years, Whitehead Monckton’s investment management department has offered financial planning and the management of portfolios of stocks and shares to clients of the firm as well as the wider world. Sometimes these activities go hand in hand and sometimes they are separate matters.
We are often asked about the question of risk and it is clear that it means different things to different people. One point we always bear in mind is that when we are investing for clients it is their money, and they are the ones who need to sleep at night. For this reason, we take great pains to make sure our clients understand the degree of risk they are taking by placing their investments with us.
It is impossible to win the great prizes of life without running risks
The 18th-century Italian writer and poet, Metastasio, wrote: “Every noble acquisition is attended with its risks; he who fears to encounter the one must not expect to obtain the other." In the 20th century, Theodore Roosevelt put it more succinctly when he said: "It is impossible to win the great prizes of life without running risks”.
You will probably be bored with reading that shares and other similar investments can go down as well as up, but it is true and should never be forgotten. When we invest on behalf of our clients, we seek to mitigate the risks involved as much as possible, but risk cannot be eliminated – even bank deposits might not be risk free, as those queuing outside Northern Rock branches feared.
Avoiding risk
So what is risk and how do you avoid it while still having a chance of a reasonable return on your money? The spectrum of risk starts with cash deposits – despite the Northern Rock debacle, they are generally thought to be risk free and provide a return by way of a rate of interest. Next comes government debt in the form of gilt edged stocks (gilts), then corporate bonds, stocks and shares and lastly some of the more exotic, derivative products such as futures and options.
The trouble with cash is that it is eroded by inflation and the income from it will fluctuate with prevailing interest rates, which is not ideal if you are relying on it to pay your bills. The price of fixed income stocks, like gilts and bonds, is normally fairly stable but will fluctuate with interest rates and sentiment about the economy, and you may lose money if you have to sell or if the company guaranteeing them goes bust.
Stocks and shares can and do fluctuate quite a lot. Over the years, the trend has been generally upwards, but you have to be able to take a long-term view to have the best chance of seeing real growth.
The income from shares is paid as dividends, which are your share of the profits of the company. Dividends in companies that are doing well are often increased every year by more than the rate of inflation, but there is always the danger that the company in which you are invested runs into trouble and has to cut its payout – which would probably result in a fall in the share price as well.
Spreading the risk
The risk you accept if you buy shares in one company is that the company will fail and you will lose all your money. Fortunately, this is rare, but it does sometimes happen.
This is why we spread risk by investing in a variety of different companies and sometimes in different asset classes. Exactly how we go about this depends on how much money clients have to invest and how much risk they are prepared to take. Clients with relatively small amounts are often advised to invest in unit trusts or investment trusts, which are vehicles which pool your money with that of other investors and put it into a fairly large number of underlying assets. Larger clients will frequently have a portfolio of individual shares in a variety of individual companies.
Clients who are prepared to accept a moderate degree of risk should see a good return on their investments over a period of a few years, but they will almost certainly make a few losses along the way.
Our job as investment managers is to attempt to minimise the losses and maximise the profits without taking more risk than is acceptable to the individual client for whom we are acting.
John Kennett is a senior investment manager at Whitehead Monckton and manages investment portfolios for private individuals, pension schemes and trusts. He worked in the City for more than 30 years, where he managed investments for both UK and offshore clients. He was elected a member of the London Stock Exchange in 1970 and gained experience with a number of leading City firms, being formerly a director of Capel-Cure Myers and an Associate Director of Newton Investment Management. John is a Fellow of the Securities Institute and a Freeman of the City of London.
Further information
The value of shares and the income from them can go down and the investor may not get back the amount invested. Past performance is not necessarily a guide to the future.
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For further information, tel: 01622 698000 or 01580 765722.