Suffer a 30 per cent fall the day after retirement and compound that loss with withdrawals and a drawdown fund will be seriously depleted. But, an identical market fall 20 years into retirement will have a far less significant impact on the total return.
Geopolitical risks are one of the most obvious threats to investors – Greece, Russia, the price of oil, and the Chinese equity and property markets, are all impacting parts of portfolios at present, both through asset prices and huge currency fluctuations – making a diversified asset allocation strategy essential.
Then there is ‘counterparty risk’ - the risk that the financial organisation investors are dealing with goes bust. Who, in 2007, would have thought that a structured product backed by the mighty Lehman Bros would soon be paying out just a few pence in the pound?
Investors should not forget the risks that are personal to them. It is essential to impart on them how quickly their circumstances can change, whether as a result of factors within their power or beyond them. Having a child, finding or leaving a partner, becoming seriously ill or suffering bereavement can all turn a financial plan on its head.
Risk is all around us. It cannot be eliminated – it must be minimised or maximised where appropriate. But, most of all, it must be understood.
Andrew Storey is technical sales director at eValue Investment Solutions
