In business, we face economic risks. Assessing these and acting upon them often needs specialist help as we do not have the experience, qualifications or training to make an accurate assessment ourselves. If you are presented with an investment, how do you assess whether it is right for you? Due diligence and research are the keys and whilst you can do some of this for yourself, you are best to rely on an appropriately qualified and experienced financial adviser to make this assessment on your behalf.
This is not straightforward. To determine an appropriate risk for you, the adviser needs to understand your personal circumstances and attitude to certain situations. To determine this, they must find out facts about you, your family life and career, your aspirations and investment goals. To do this, they must use a fact find and risk profiler.
A Risk Profiler is a tool to assess your attitude to risk. It may sound simple to say I am low, medium or high risk, but when asked relevant, specific questions, they may reveal otherwise. Good questioning will reveal your risk tolerance, willingness and ability to take risk in the context of your investment needs.
The results will enable the adviser to recommend an investment solution appropriate to your current level of risk and personal circumstances, rather than merely suggesting a product.
This may change over time with changes to your personal circumstances or attitudes as we grow older. The assessment needs to be kept up to date and appropriate investment changes. This is where a close relationship with your adviser is key.
There are several different types of risk associated with investments
Inflation - If you put money in a bank you are subject to inflation risk. To a degree, the same applies to investments. If you do not take sufficient risk, you will not beat inflation. Even where you have a defensive attitude there must be some risk in order not to stand still.
Market Risk – This is the risk of your investment declining in value due to economic developments. If you invest in one asset, this greatly increases the risk of a market fall affecting your wealth. If you invest in one market but several assets, this reduces the risk, but still poses as significant risk. We therefore recommend diversification using an investment manager who invests in multiple assets in all asset classes to ensure one asset fall only has a minor impact in your overall portfolio. If you adviser is recommending single assets, ask yourself why?
Currency Risk – This is something pensioners or people paid in a foreign currency are acutely aware of with the relative strength of the Thai Baht compared to the British Pound for example. Holding assets in different jurisdictions from where you are spending introduces and inherent currency risk.
Liquidity Risk – This only applies when you want to get your hands on your money. Whether retirement, education fees or lifestyle changes, you are investing for a reason. You may be able to mitigate these with other assets and or delaying your monetary requirements, but if markets are low, you may have no choice but to draw on your investments. It is important your adviser knows your needs and any changes in them to ensure your needs are met.
Credit Risk – This applies only to the bond asset class. It’s the risk the government entity or company that issued the bond will run into financial difficulties and won’t be able to pay the interest or repay the principal at maturity. You can check credit ratings yourself, but a good investment manager will best choose investments which match your risk profile and investment time horizon.
Horizon risk - The risk that your investment horizon may be shortened because of an unforeseen event, for example, the loss of your job. This may force you to sell investments that you were expecting to hold for the long term. If you must sell at a time when the markets are down, you may lose money. This could happen to anyone, sometimes without notice due to illness etc, but where possible, a close relationship with your financial adviser will help to mitigate and re-evaluate when needed.
Longevity risk - The risk of outliving your savings. This risk is particularly relevant for people who are retired or are nearing retirement. This is where regular reviews on your personal circumstances and investment performance with your financial adviser are key to ensuring you are spending and budgeting to your means and that goals or strategies are changed as appropriate.
Review your investments regularly and ensure they still match to your personal circumstances. Regular updates with your financial adviser will ensure this is a natural progression.
This is defined as “reasonable steps taken by a person to satisfy a legal requirement, especially in buying or selling something”. Your due diligence is on choosing the correct adviser to work with. The adviser’s due diligence requirement is on choosing the most appropriate investment managers to suit their clients. The investment managers due diligence is selecting the most appropriate investments. If this is right, you will have investments which work for your personal circumstances.
We’ve discussed different asset classes and the importance of diversification and so will look more in depth and stock (equity) markets. AIMS do not undertake investment management as a) in Thailand we are not regulated to do so and b) we do not have the appropriate experience, qualifications, time and regulatory oversight. We therefore work with professional regulated UK and Channel Islands investments managers who make these decisions on our clients’ behalf. It is very important that investment decisions are totally independent from the financial adviser so there are no conflicts of interest. If you currently have an adviser acting as an investment manager and researcher, I would question how they have the time, experience, qualifications and license to do so. This increases risk by allowing one person to take all responsibility instead of ensuring all the elements of the process remain independent.
In their analysis and decision making, the investment manager will have a regulatory signed off process. They will research, evaluate and make decisions by looking at demographics, asset classes, geographies, market data, asset data, making risk-based portfolio construction and ongoing asset management as a result. Fundamental to these decisions will be major countries economic and industrial data from jurisdictions such as US, UK, Europe, Emerging Markets, Japan and SE Asia.
If we look at equity fund managers in 2018, rather than individual assets, there was a marked difference in the best and worst performers in their ability to perform and how their asset classes performed. The best performance saw a gain of 26% which represented a significant allocation to technology stocks. The worst performing was a loss of 278.8% in an Indian Select strategy. December 2018 alone was very volatile with difference in performance ranging from gains of 11.98% in a gold and precious metals fund to a loss of 14.45% in a Japanese smaller companies’ fund.
Choosing which fund managers and sectors to invest in takes much manpower and knowledge, so it best left to the professionals rather than an individual or advisory company trying to make these decisions on your behalf. It is impossible for unqualified people to accumulate the knowledge or have the time to select the most appropriate assets in the global markets we see today.
Paul Wyatt is Managing Director of AIMS PI (Thailand) Limited, a Bangkok-based financial adviser who worked in the UK pensions industry from 1985 and in Thailand since 2009. Email firstname.lastname@example.org, call +66 (0) 847376036 or visit AIMSpi.com