OBJECTIVE BASED VS. RISK BASED INVESTING
Once we understand your objectives and develop your financial strategy, we will invest funds in accordance with the risk profile that is based on the level of risk you are comfortable with.
The diagram below shows the long term relationship between risk profile and returns. As you increase the growth assets in your portfolio you expect to generate higher returns in the long term, but you also experience higher levels of risk or volatility.
Investing funds based on your risk profile rather than your objective may have resulted in you taking on greater level of risk than required to achieve a financial objective.
For example, some clients have invested their superannuation money in 70% growth assets over their working life and have maintained the same exposure to growth assets in retirement. These funds have been built up over the years to provide an income stream to cover living expenses in retirement. These clients are comfortable with holding 70% of their superannuation assets in growth investment in retirement and appreciate the market volatility of their portfolios.
What is interesting to note is that the income requirements from the portfolio would allow the client to decrease exposure to growth assets and still produce the required level of retirement income. The result would be a portfolio with less volatility helping the client sleep better a night. However by decreasing your exposure to growth assets, you are likely to decrease your overall long term wealth.
ACD, through its review process discusses with clients investing funds based on risk profile versus objectives. We have found a mixture of responses, and will tailor your investment choices and portfolio to reflect your desires in both the short and long term.