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INVESTING
Investment Rules
Darnells Wealth Management clients benefit from our experience, knowledge and skill to provide an investment journey with care and attention every step of the way.
Risk Versus Reward
RISK
If you intend to purchase any investment - such as equities, property or bonds - it is important that you understand before you invest that you could lose money.
REWARD
The reward for taking risk is the potential for a greater investment return above deposit based investments. If you have a long term financial goal, you might expect to make more money by carefully investing in asset categories with greater risk, like equities or bonds, rather than restricting your investments to assets with less risk, like cash. On the other hand, investing solely in cash investments may be appropriate for short-term financial goals, yet you may still expose yourself to risks, such as low interest rates or inflation that gradually erode the purchasing power of your money. However, just because you have a long time horizon, you do not always need to take higher risk. Helping you with this decision is a central part of our advice process.
Risk In Varying Forms
When we refer to risk, not only do we consider capital risk via market fluctuations, there are other risks to consider – these include:
INTEREST RATE RISK
The risk that interest rates should rise and how this would affect asset prices, particularly in bond investments.
INFLATION RISK
The risk that the growth of your assets is below inflation, resulting in a reduction in the future purchasing power of your assets.
POLITICAL RISK
Politics has a destabilising effect on many investment markets, new policies and announcements can affect investor sentiment and confidence in certain markets.
LONGEVITY RISK
The risk of your capital being eroded by poor performance / charges / fees and not being sufficient to meet your longer term objectives – you simply run out of money.
EVENT RISK
Whilst we endeavour to build diversified portfolios, when extreme events occur – such as the 2007-09 credit crisis, or the 2020 Covid pandemic, all assets can fall in value at the same time.
This is far from an exhaustive list; however this does underline the amount of work we undertake on your behalf to ensure that your investment portfolio is not exposed to unnecessary risks.
Asset Classes
BONDS
A bond is an investment whereby an entity (usually a Government or a Company) borrows money for a defined period of time at a variable or fixed interest rate. Therefore, bonds can also be known as “Fixed Income” investments. These types of investments are considered to be less volatile as the loan is secured against the entity, although the price will fluctuate depending on factors such as the credit quality of the entity, the time to repayment of the loan and the attractiveness of the income versus other available asset classes.
PROPERTY
Commercial Property funds predominantly invest in Bricks and Mortar property, not property shares. The term commercial property (also called commercial real estate) refers to buildings or land intended to generate a profit, either from capital gain or rental income, or a mix of both.
Increased Investment Risk
ALTERNATIVES
Cash, Bond, Property and Equities are seen as the main asset classes, but at times of market stress these assets can move down together, so we also consider alternative sources of risk and reward, like commodities (precious metals, crops etc) to further diversify your portfolio.
EQUITIES
Equities are share holdings in companies that allow an investor to participate in the growth of the firm. As companies grow through time they will experience good times and hard times and their share price will fluctuate accordingly. Equities are therefore higher risk investments and you need a long investment horizon to hold a portfolio invested predominantly in equities to allow your portfolio time to recover from any periods of market weakness. We invest in more mature Developed Markets (such as UK and the US) along with Developing Markets that are younger and more volatile (such as Asia and Emerging Markets). As you move up the risk profile towards 10 out of 10, you will hold more Developing Market equities for the long term growth potential on offer. This comes with a higher level of capital fluctuation – both positive and negative.
