Source: Bloomberg, Netwealth Investments' Calculations
Return series are calculated as the total return on the UK 1m LIBOR Cash Index, deflated by RPI, for UK Cash. The Netwealth Risk Level 4 return series is the simulated historical performance of the current strategic allocation, net of management fees and underlying fund costs, deflated by RPI. Past performance is no guarantee of future performance.
Why we are fearful of taking risk
As well as making intuitive sense, the psychology professor Nicholas Carleton has posited that the fundamental fear we possess is fear of the unknown.1 Investing money comes with a great deal of uncertainty – with issues further clouded by an excess of noise. This explains why we are often slow to do something positive with our money, even in the face of diminishing capital in a savings account.
The influence of behavioural psychology may also account for our inertia. For example, an effect known as hyperbolic discounting causes us to consider the effects of our decisions less the further in the future they fall. Likewise, if many investors seem to be getting out of the market – or are simply talking about it – the ‘thinking trap’ of herd behaviour may lead us to copy the actions of others, causing the fundamental strengths of investments to be ignored.
How choices can help you to overcome risk
You can be invested at different levels of risk. And having professionals to invest on your behalf can alleviate much of this risk, lessening your uncertainty as a result.
“We give investors a choice of seven diversified portfolios with different risk levels,” says Iain Barnes, Netwealth’s head of portfolio management. “This means that investors can choose from very low risk, which invests mainly in high quality, often short-dated bond funds, to a portfolio that is concentrated in growth assets like equities – with various mixes of investments, and therefore levels of risk, in portfolios between these two poles.”
Because you can tailor risk levels to suit your preferences, choosing to invest, therefore, is not a binary choice of yes or no. To avoid the depletion of your funds due to inflation, a low-cost, diversified portfolio managed for you could be an ideal option to coincide with how much risk you are comfortable taking.
1Research paper by Professor Nicholas Carleton ‘Fear of the unknown: One fear to rule them all?’
Please remember that when investing your capital is at risk.