Understanding risk

Simon's market view

It is said that in economics, if you understand the concept of supply and demand, you can understand economics. The same could be said of investment. If you understand the concept of risk and reward much of the mystery of investments is unravelled. That is, the greater investment return you are looking for, the greater risk you will have to take to achieve it. However, the turmoil of the past couple of years has, in some cases, turned this on its head. Is your bank safe? Are your government securities totally guaranteed? It would seem that most banking institutions are safe, and Governments won’t fall, but there was a period when we weren’t really sure.

What is certain is that investors need to understand  the risk they are taking with any type of investment whether it be a deposit account or a speculative investment.

My view on investment going forward is as follows:

Equities (Stocks & shares)

With dividend income from equities sitting at about 3% at present and 5-10 year gilt income hardly higher, equities look good value. They would certainly be the best long term bet for those looking for a rising income to beat inflation. Personally, I would prefer to invest with managers who can identify quality stocks in difficult times, and have a track record of doing so rather than funds that simply track the market at present.

Property

I cannot help but think that the loss of jobs in the public sector is going to have a detrimental affect on house prices. I feel that buying a property to rent at present, is probably better left to professional landlords, who look for income returns rather than capital growth.

Commercial property took an absolute hammering during the recession. Far from out of the woods yet, it has an attractive income yield, which is why we are happy for it to form a small part of our clients portfolios.

Cash

I have not changed my view from last month, in that I see low interest rates being here for some time to come. Of course, this is useless for those seeking income from their investments.

There is some inflationary pressure from the Far East which could drive up the price of imports to the UK, but overall I cannot see that inflation will take hold for a while. This will allow the Bank of England to keep interest rates on hold, possibly for up to 4 years.

Fixed interest

This is probably the part of the market that confuses clients most. This is, in general, borrowing by Government and Companies, which can provide the opportunity for ordinary and institutional investors (pension funds etc) to get a high and regular income. The problem is that this area contains everything from Gilts (UK Government Bonds) to what have been called Junk Bonds (where lowly credit rated companies raise money on the open market), where the income generated for investors is much higher, but at a greater risk.

For further information contact Simon Ludden, Financial Planning Manager, on 01227 763939.