Yet we still continue to refer to bonds as ‘cautious’ or ‘careful’ and equities ‘adventurous’, ‘risky’ or ‘dynamic’, or whatever synonym the industry coughs up to put one particular asset class inside a box of which there is no escape.
These descriptive words, more often than not, indicate to what extent bonds or equities take up an investment portfolio. It does not account for a 20-year investment horizon and the impacts of inflation, relative to these asset classes, ie a risk.
It does not account for the sustainability of income throughout retirement, and how various asset classes impact this, ie a risk. Is this adding value or assisting good client outcomes?
Much of this, in my opinion, is hinged on volatility. Equities tend to fluctuate in value more significantly and shareholders are the last to be paid in insolvency, but is that greater than the risk of central bank monetary policy and long-term inflation risk?
Does a more volatile daily price change really make it riskier when we look at the long-term benefits of investing and wealth creation? Surely what is ‘risky’ or ‘careful’ is just as subjective as whether or not a fund management philosophy is ‘ethical’?
By pre-determining these factors, we are making the educative relationship with clients a little more difficult than necessary.
Adam Cockerham is a director and chartered financial planner at William Dixon and Associates
