A core approach to risk management is to spread your investments across a portfolio. Historically, investing in property-backed opportunities such as residential buy-to-let required a substantial amount of capital and for most, this remained out of reach.
As a solution to this, investment providers have found ways to reach out to private equity held by individual investors by accepting investments of moderate amounts. Many investments that we work with have a minimum of £10,000.
This makes it more viable and attainable for investors to spread the risk out across a portfolio of investments.
A cautious approach could be to consider a minimum of three investments, regardless of how small you find and never put more than 30% of the funds into one investment. This gives the investor a conservative approach with reduced risk.
You can reduce the overall risk in an investment portfolio and potentially boost your overall returns by investing in asset combinations that are not correlated. This is also known as modern portfolio theory.
It means that assets don’t tend to move in the same way at the same time.
For example - a correlation of 50% between two assets means that in the past when the return on one asset was going up then about 50% of the time the other asset was going up too. However, a correlation of -70% tells you that historically 70% of the time they were moving in opposite directions.
A correlation of 0 means that the returns of assets are completely uncorrelated - the price movement on one has no effect on the other.
This is particularly important when stock markets are volatile. If you are invested in an asset with no correlation to the stock market then you are unlikely to suffer from the same volatility.
One of the most important beneficial aspects in Alternative Investments. Diversification means spreading your assets beyond just holding a portfolio.
For example, an investor who has property assets spread across 3 countries and including commercial property, residential and property development shows excellent diversification. However, a portfolio with 5 BTL properties in the same street in Manchester would present zero diversification.
At Avantis Wealth, we take great care to offer a portfolio which can easily be used to build a well-diversified portfolio. Understandably, some investors want to limit investment to what they have previous experience of, finding it difficult to accept true diversification. By limiting the diversification, they can actually place themselves at greater risk.
Volatility is a major risk element within a portfolio. Shares, for example, show varying levels of volatility from modest to extraordinary. Volatility can be either short or long term. The problem for investors with long term volatility is that if they need to withdraw cash from an investment - in the middle of a downturn - the value of their portfolio can be significantly less than anticipated.
Volatility also makes it extremely difficult to predict future growth. Large levels of volatility increase uncertainty and increase risk.
The good news is that Avantis Wealth take an approach to eliminate volatility. Investments are set at a fixed amount, with a fixed return. Investors have a legally binding contract with a contractually enforceable return clearly spelled out.
Liquidity is the risk that a company or bank may be unable to meet short term cash demands. This usually occurs due to the inability to convert a security or hard asset to cash without a loss of capital and/or income in the process.
The Financial Conduct Authority (FCA) considers that investments which are ‘liquid’, those that can easily and quickly be converted into cash are inherently less risky than investments that are ‘illiquid’.
Our investments are not usually liquid within the FCA’s meaning of the word. They are not normally quoted on a recognised exchanged or can be turned into cash, except at maturity. (Note that some ISA investments are liquid).
A balanced portfolio will see you holding some funds in cash or instant access account, some funds with relatively quick access as a ‘rainy day’ fund, and sensible planning for the future with a range of maturity dates on your investments.
If you adopt this approach, the issue of liquidity becomes a non-event and you will not face a risk of needing funds when they have been committed to an investment, which has more time to run to maturity.
Alongside the core values that Avantis Wealth hold dear, having a straight forward investment structure helps to reduce risk as you grow in knowledge.