Hi, I’m Dennis Hoe, Advisory Team Lead at MoneyOwl. Thank you for your question. As the other respondents have highlighted below, there is a correlation between return and risk. Risk is often proxied by volatility, though in a sense it is only one aspect of risk. The difference between a low-risk and high-risk portfolio typically lies in the asset allocation between equities and bonds, as equities have higher volatility than bonds. A low-risk portfolio generally has higher allocation into fixed income/bonds. If the bonds are of investment-grade, the returns are generally stable and is less volatile. However, the long-term returns are lower, as compared to investing into equities. A high-risk portfolio typically has more allocation in equities. Historically, equities have always been the driver for returns as stock market goes up in the long term due to growth in global demand. In a study of the US market between July 1926 to December 2017 done by Dimensional Fund Advisors, we see that in any 10-year period, out of 991 overlapping periods, equities beat Treasury bills (short-dated government bonds generally regarded as risk-free) 85% of the time. A well-diversified portfolio of equities is better positioned to gain higher return in the long term but it is more volatile (higher fluctuations). That said, while we all know that equities go up in the long term, it is important to be invested in a portfolio that suits your risk appetite in which you can stay invested comfortably throughout the fluctuations during your investment period. Because the worst thing that you can do is get out too early when the market plunges as a result of not being able to handle the volatility emotionally and miss out on capturing market returns. If so, it might be better for you to have some bonds in your portfolio to dampen volatility but stay invested to reap the long-term return of that asset allocation. To determine which type of portfolio is suitable for you, our advice is structured around these 3 factors: 1) Need to take risk – What are you investing for? Are your current resources enough to meet the goal? The higher your goal relative to your resources, the higher the need for return. 2) Ability to take risk – Your financial situation. Do you already have your emergency funds in place? How long of an investment period do you have to reach your goal? The longer the investment period, the more capacity. For a pure equity portfolio, MoneyOwl recommends 15 years to have a high degree of certainty of having no negative annualised returns, based on historical observations over the long term. If “tail events” are excluded, this 15-year time frame reduces to about 10 years. However, the caveat always is that historical returns are not a guarantee of future returns. 3) Willingness to take risk – What is your likely reaction to the fluctuation of your investment return? Will you sell off your investment when the value drops in event of market downturn? This is your tolerance for short-term losses and fluctuations. At MoneyOwl, we believe that successful investing is not about maximising returns. Rather, we emphasise sufficiency of returns and the reliability of those returns. As mentioned, volatility is only one perspective of risk. From a financial planning standpoint, not being able to meet the return you need to live the life you want, or having your purchasing power eroded by inflation, are also risks. Thus, successful investing for individuals is really about getting the highest probability of getting sufficient returns, with as little guesswork and as little as stress possible, that will meet your goals such as financial independence. Having the right asset allocation for market-based returns, keeping costs low and very importantly, staying invested for the long term are the keys to a successful investing experience. Hope this helps – and if you would like to speak with someone, please feel free to contact us at [email protected]
). As we are a Bionic Financial Adviser rather than a pure robo, my team of client advisers will be most happy to have a discussion with you about your risk profile.