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Should You Invest When Markets Are at an All-Time High?

Should You Invest When Markets Are at an All-Time High?

“Invest for the long haul. Don’t get too greedy and don’t get too scared” — Shelby M.C. Davis

3 min read

Should You Invest When Markets Are at an All-Time High?

“Invest for the long haul. Don’t get too greedy and don’t get too scared” — Shelby M.C. Davis 

3 min read

Listen to this article

Investing at an all-time high can feel like investing at exactly the wrong time.

If markets have already risen, it is easy to assume that the opportunity has passed or that a decline must be approaching.

However, markets do not operate around previous record levels. They respond to changing expectations for company earnings, economic growth, interest rates, inflation, and many other factors.

A record level tells us where a market has been. On its own, it tells us relatively little about where it will go next.

How common are all time highs?

An all-time high simply means that a market has reached its highest recorded value to date.

While this can feel exceptional, history suggests they are surprisingly common.

Analysis of the US stock market between January 1926 to the end of 2024 found that the market was at an all-time high during 363 of the 1,187 months analysed, equivalent to approximately 31% of the time.

This is a natural consequence of long-term market growth. An index cannot rise substantially over several decades without repeatedly reaching and surpassing previous records along the way.

What happens after markets reach record levels?

An all-time high can create the impression that markets have reached a ceiling, making a decline feel more likely than further growth.

However, US market data since 1926 does not support this assumption. Average inflation adjusted returns during the 12-months following an all-time high were approximately 10.4%, compared with 8.8% when the market was not at a record.

Over two and three year investment horizons, returns were broadly similar whether investing at an all-time high or at other times.

This does not mean markets will always continue rising after reaching a record. Rather, reaching an all-time high has not historically been a reliable indicator that poor returns will follow.

Remember, past performance is not indicative of future returns.

Price and valuation are not the same

An all-time high is sometimes interpreted as a sign that investments have become expensive. However, price and valuation measure two different things.

  • Price is what an investment or market index is worth at a particular point in time. An all-time high therefore tells us that its price is higher than it has ever been previously.
  • Valuation considers what is being paid relative to the underlying fundamentals, such as company earnings, revenues, cash flows, or expected future growth.

This distinction matters because these fundamentals can also increase over time. A higher market price may therefore be supported by higher corporate earnings, economic growth, productivity, or innovation.

A market can consequently reach an all-time high without necessarily being overvalued. Equally, a market trading below its previous record can still be expensive relative to its underlying fundamentals.

Record market prices can therefore mean very different things depending on what has driven the increase, with the underlying fundamentals often providing greater insight into what is happening within the market.

The potential cost of waiting

Faced with record markets, the temptation can be to remain in cash and wait for a better opportunity.

The problem is that markets may continue rising before the next correction occurs. Even after a subsequent decline, prices could remain above the level at which the decision to wait was originally made.

For example, a comparison of two hypothetical strategies using US market returns since 1926 found that $100 invested continuously would have grown to approximately $103,294 by the end of 2024, after adjusting for inflation.

By comparison, the same $100 moved into cash for the month following each all-time high, before being reinvested when the market was no longer at a record, would have grown to approximately $9,922, around 90% less than remaining continuously invested.

Maintaining a long-term perspective

Decisions based on whether markets feel high or low can easily become attempts to time short-term movements rather than decisions based on a long-term investment strategy.

At Patterson Mills, we help our clients block out the unnecessary noise and stick to their long-term plan through a tried and tested process of ongoing review of investments, appropriate diversification, risk rated portfolios, and adapting to changing financial circumstances rather than individual market milestones.

If you would like to review whether your current investments remain appropriately positioned for your future plans and wider financial circumstances, get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Source: Schroders, 2025

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Financial Planning Investments

Myth-Busting: Sell in May and Go Away?

Myth-Busting: Sell in May and Go Away?

“Invest for the long haul. Don’t get too greedy and don’t get too scared” — Shelby M.C. Davis

3 min read

Myth-Busting: Sell in May and Go Away?

“Invest for the long haul. Don’t get too greedy and don’t get too scared” — Shelby M.C. Davis 

3 min read

Listen to this article

Summer is often associated with taking a well-earned break, spending more time outdoors, or enjoying a holiday.

Investment markets have long had their own association with the season. The old market saying “sell in May and go away”, popularised during the 1950s, reflects the belief that equity markets tend to underperform during the summer months.

Whilst there is some historical evidence to support this pattern, it is far from a reliable investment strategy and remains widely debated.

What does the data suggest?

The “sell in May and go away” adage is based on the observation that equity markets have, on average, delivered lower returns between May and October than between November and April.

Since 1990, the S&P 500 has generated an average return of approximately 3.0% during the May to October period, compared with around 6.3% between November and April.

However, the evidence is far from conclusive. Looking at different market indices or extending the time period can produce very different results. For example, analysis of the S&P 500 dating back to the 1930s shows that, in several decades, the summer months actually outperformed the winter period.

Individual years also vary considerably. In both 2009 and 2020, summer returns significantly exceeded those achieved during the preceding winter months.

Why might summer markets behave differently?

There is no universally accepted explanation for why seasonal patterns appear in financial markets.

Lower trading volumes during the holiday season are often cited as one possible factor, as reduced market participation can influence liquidity and short-term price movements. Investor sentiment, institutional portfolio rebalancing, and seasonal changes in risk appetite have also been suggested as contributing factors.

However, these influences are often outweighed by more significant drivers of investment returns, including interest rates, inflation, corporate earnings, economic growth, geopolitical developments, and monetary policy.

In practice, markets rarely move because of the calendar alone.

The risk of trying to time the market

The key question is not whether summer returns have occasionally been weaker, but whether acting on this historical pattern improves long-term investment outcomes.

Moving in and out of markets requires two correct decisions: when to sell and when to reinvest. Getting either decision wrong can result in missing periods of strong market performance.

This is often easier said than done. Research has consistently shown that missing just the market’s 10 best trading days over a 20- to 30-year investment period can reduce long-term returns by more than half. Many of these strongest trading days also occur shortly after periods of market weakness, rather than following a seasonal pattern.

Frequent trading can also create transaction costs, potential tax consequences, and unnecessary disruption to a long-term investment strategy.

For many investors, remaining appropriately invested has historically proven to be a more reliable approach than attempting to predict short-term market movements or seasonal trends.

Investment returns are driven far more by asset allocation, diversification, corporate earnings, interest rates, inflation, valuations, and economic growth than by the month in which capital is invested.

Structuring portfolios for the long-term

Whilst seasonal market patterns can provide useful context, they form one small part of a much broader investment picture.

At Patterson Mills, we believe successful investing is built on disciplined portfolio construction, regular reviews, and ensuring that investment strategies continue to reflect changing objectives, risk tolerance, and personal circumstances over time. 

Rather than reacting to short-term market trends or seasonal patterns, we work with clients to ensure their portfolios remain appropriately diversified and aligned with their long-term financial goals. 

If you would like to review whether your current investments remain aligned with your circumstances, get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

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Financial Planning Investments

The Limits of Diversification

The Limits of Diversification

“To reduce risk it is necessary to avoid a portfolio whose securities are all highly correlated” — Harry Markowitz

3 min read

The Limits of Diversification

“To reduce risk it is necessary to avoid a portfolio whose securities are all highly correlated” — Harry Markowitz

3 min read

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Diversification is often cited as one of the most important principles in successful investing, and history has generally supported that view.

By spreading investments across different assets, sectors, regions, and economic drivers, diversification helps reduce concentration risk and avoids excessive reliance on any single investment outcome.

However, diversification is not designed to eliminate risk altogether.

During periods of significant market stress, investments that would normally behave differently can respond in a similar way due to the same underlying pressures.

This is known as correlation risk.

What is correlation risk?

Correlation risk is the danger that assets, strategies, or economic factors may become more closely linked than expected, reducing the benefits of diversification and increasing potential losses during market downturns.

When two investments are highly correlated, they tend to rise and fall at similar times. When correlation is low, their returns are more independent of one another.

The challenge for investors is that correlations are not fixed and can change significantly over time. Assets that appear well diversified during normal market conditions may become increasingly correlated during periods of economic uncertainty or market stress, reducing the protection that diversification would otherwise be expected to provide.

When markets move together

Periods of rising correlation do not mean diversification has become ineffective. Rather, they reflect the fact that many investments are ultimately influenced by a number of the same underlying economic and market forces.

During periods of heightened volatility, investors often reassess risk across large parts of the market simultaneously. This can result in broad selling across multiple asset classes, sectors, and regions, even where the underlying fundamentals remain different.

As a result, investments that would normally exhibit lower levels of correlation can begin moving more closely together, particularly over shorter periods.

Many growth-oriented investments ultimately share common drivers including:

  • Economic growth 
  • Corporate profitability 
  • Interest rates 
  • Investor confidence 
  • Liquidity conditions

When these factors deteriorate, many growth assets can come under pressure at the same time.

However, this does not mean all investments are exposed to identical risks to the same degree. Even within equity markets, different regions, sectors, and companies are influenced by different economic conditions, valuations, competitive advantages, and long-term growth drivers.

Why diversification still matters 

Equities have historically been one of the primary drivers of long-term capital growth. Consequently, accepting some degree of correlation risk is often an unavoidable aspect of seeking higher long-term returns.

The aim is not to eliminate correlation risk altogether. Instead, it is to reduce unnecessary concentration by spreading exposure across a broad range of investments, regions, sectors, and economic drivers.

For example, a portfolio invested entirely in large US technology companies may deliver strong returns during favourable market conditions. However, it would also be heavily exposed to developments affecting a relatively narrow part of the market.

By contrast, a globally diversified growth portfolio spreads exposure across different countries, industries, companies, and sources of return. While many of the underlying investments may still be influenced by the broader forces affecting equity markets, the portfolio is not solely dependent on a single sector, region, or economic outcome.

In practice, diversification often involves combining investments across a range of asset classes and markets, including:

  • Developed market equities 
  • Emerging market equities 
  • Government bonds 
  • Corporate bonds 
  • Cash 
  • Property and infrastructure 
  • Other real assets 

These assets may not always move independently, particularly during periods of market stress. However, they can respond differently over longer periods of time and under different economic conditions, which is why diversification remains a key part of portfolio construction.

Structuring portfolios for long-term resilience

Correlation risk reminds investors that markets are constantly evolving. Relationships between investments that appear stable during one period may look very different when economic conditions, investor sentiment, interest rates, or geopolitical events change.

For this reason, portfolio construction should not rely solely on how investments have behaved in the past. Consideration must also be given to the underlying drivers of returns and how different investments may respond under a range of future market conditions.

At Patterson Mills, we work with clients to build portfolios that seek to balance long-term growth objectives with effective risk management. While no portfolio can eliminate market risk entirely, careful diversification, regular review, and disciplined portfolio construction can help investors remain resilient in an environment where market relationships are rarely static.

If you would like to review whether your current investments remain appropriately diversified and aligned with your long-term objectives, get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

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Financial Planning Investments

Understanding Sequencing Risk in Retirement

Understanding Sequencing Risk in Retirement

“Capital is that part of wealth which is devoted to obtaining further wealth” — Alfred Marshall

3 min read

Understanding Sequencing Risk in Retirement

“Capital is that part of wealth which is devoted to obtaining further wealth” — Alfred Marshall

3 min read

Listen to this article

Retirement planning is often focused on building sufficient wealth to support future income needs.

However, the transition from accumulating wealth to drawing from it introduces a different type of investment risk; one that is driven not only by market performance itself, but by the timing of that performance.

This is known as sequencing risk, and it can have a significant impact on how long retirement savings ultimately last.

What is sequencing risk? 

Sequencing risk refers to the impact that the timing of investment returns can have when withdrawals are being taken from a portfolio.

  • During the accumulation phase, individuals are still working, earning income, and building wealth through ongoing contributions to various investment accounts. Market volatility is often less damaging during this stage because capital continues to be added to the portfolio over time and there is generally a longer period available for recovery.
  • Retirement marks the transition into the decumulation phase, where portfolios begin supporting your lifestyle through withdrawals.

Once withdrawals begin, periods of negative market performance can have a much greater impact, particularly if they occur early in retirement.

If investment values fall while withdrawals are being taken, more assets may need to be sold to generate the same level of income. This leaves less capital available to participate in any subsequent recovery.

Over time, this can compound the impact on future growth and potentially reduce the longevity of the portfolio.

The risk of early losses 

The early years of retirement are often the most sensitive from a planning perspective. 

A significant market decline shortly after retirement can have a lasting impact because the portfolio faces two pressures simultaneously:

  • Declining market values  
  • Ongoing withdrawals

By contrast, where investment markets perform more favourably during the earlier years of retirement, the portfolio benefits from a stronger capital base from which to absorb future volatility.

Importantly, sequencing risk does not necessarily reflect poor long-term performance. Two portfolios may generate similar average returns over time, yet experience very different outcomes depending on when positive and negative returns occur.

This is why sequencing risk is often driven more by timing than performance alone.

Managing sequencing risk

Sequencing risk cannot be eliminated entirely as market volatility remains a fundamental part of investing. 

However, retirement portfolios can often be structured differently to help reduce the impact that adverse market conditions may have during periods of withdrawal.

This typically involves balancing:

  • Short-term income requirements 
  • Longer-term growth objectives 
  • Liquidity needs 
  • Overall portfolio resilience

Rather than treating all invested capital the same way, retirement portfolios are often segmented according to different time horizons.

For example:

  • Capital needed in the near term may be held in lower-volatility assets designed to provide stability and accessibility 
  • Medium-term assets may retain some growth exposure while aiming to manage downside risk 
  • Longer-term capital may remain invested for growth to support later stages of retirement and help offset inflation over time

This approach aims to reduce reliance on selling growth assets during periods of market weakness.

Long-term planning 

Sequencing risk highlights that retirement planning is not only about building wealth, but also about managing and sustaining wealth throughout retirement.

During accumulation:

  • Contributions continue adding capital 
  • Time horizons are generally longer 
  • Volatility can often be tolerated more easily

During decumulation:

  • Withdrawals increase sensitivity to market movements 
  • Timing and flexibility become more significant 
  • Portfolio structure becomes increasingly important

Managing sequencing risk therefore involves more than simply reducing investment exposure. It requires constructing portfolios that aim to balance growth, income, liquidity, and long-term sustainability simultaneously.

Structuring for retirement 

At Patterson Mills, we help clients structure portfolios not only for long-term growth, but also for how wealth will be accessed and maintained throughout retirement. 

Whether you are approaching retirement, reviewing your withdrawal strategy, or reassessing how your investments are positioned for long-term sustainability, sequencing risk forms an important part of the wider planning process. 

If you would like to review how your portfolio is currently structured to support your retirement objectives, get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

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Investments

Investments Go Down (As Well As Up)

Investments Go Down As Well As Up
Cheering friends riding roller coaster at amusement park

Investments Go Down (As Well As Up)

“It has been quite a rollercoaster ride, but one that I’ve enjoyed” ― Bez

3 min read

Investments Go Down As Well As Up

Investments Go Down (As Well As Up)

“It has been quite a rollercoaster ride, but one that I’ve enjoyed” ― Bez

3 min read

Investing is marked by highs and lows, peaks of prosperity and valleys of decline. At the heart of this rollercoaster ride lies a simple truth: investments can go down just as swiftly as they can rise. It’s a fundamental reality that every investor, from the novice to the seasoned, must come to terms with when navigating their investments.

The Market's Downturns: A Normal Occurrence

Market downturns are inherent to the investment landscape. They are regular events that halt the upward trajectory of the financial markets. These downturns shouldn’t surprise you; rather, they are to be expected in the cyclical nature of markets.

These periods of decline can stem from various factors, including economic shifts, geopolitical events, or sector-specific challenges. However, it’s crucial to grasp that market fluctuations, both upward and downward, are a fundamental aspect of the investment ecosystem.

Typically Your Investments Do Recover

Investing isn’t just about numbers on a screen; it’s deeply intertwined with human psychology. During periods of market turbulence, fear can grip you, clouding rational decision-making. The instinct to sell and salvage what’s left can be compelling, driven by the fear of further losses. However, reacting impulsively to market volatility often leads to selling at a low point, crystallising losses, and missing potential recoveries.

History has repeatedly shown that panic-driven selling in the face of market downturns tends to be counterproductive. Emotional reactions to short-term fluctuations can derail long-term financial strategies. It’s crucial to recognise that markets, although prone to short-term volatility, have historically recovered from downturns. Selling in a panic only crystallises losses, locking in the decline without affording the opportunity to recover when markets bounce back – a pattern that can substantially impact long-term wealth-building goals.

Staying the Course in Volatile Markets

Navigating market fluctuations requires a steady hand and a long-term perspective. History has consistently shown that despite periodic downturns, the market tends to rebound, demonstrating resilience over time. Investors who remain patient and stay invested through the storms tend to reap the benefits of eventual market recoveries.

Studies have shown that attempting to time the market by selling during downturns and re-entering when conditions seem favourable often results in missed opportunities for recovery. It’s essential to recognise that attempting to predict short-term market movements is a challenging and unreliable strategy.

Instead of succumbing to fear-induced reactions, maintaining a steadfast commitment to your investment strategy is crucial. Stay focused on your long-term financial goals and the strategic plan established with your Patterson Mills Financial Adviser. Review your portfolio periodically to ensure alignment with your objectives, risk tolerance, and time horizon.

En Route to Success

At Patterson Mills, we prioritise ensuring our clients are aware of market cycles, the risk they are taking and the importance of staying the course during turbulent times. We provide personalised guidance to help you understand the implications of market volatility on your investments and devise strategies to navigate through these periods. Our goal is to give you the knowledge and confidence needed to make informed decisions, ensuring that you remain steadfast in your investment portfolio, even amidst market uncertainties.

So, get in touch with us today and book your initial, no-cost and no-obligation meeting, you will be pleased that you did. Send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all information within this article has been prepared for informational purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

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Financial Planning

Why Your Risk Tolerance Matters

Risk Tolerance
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Why Your Risk Tolerance Matters

“I think there’s a difference between a gamble and a calculated risk” ― Edmund H. North

3 min read

Risk Tolerance

Why Your Risk Tolerance Matters

“I think there’s a difference between a gamble and a calculated risk” ― Edmund H. North

3 min read

Your risk tolerance is paramount in navigating the complexities of investment decisions. It encompasses your willingness to withstand financial uncertainty or potential losses whilst pursuing investment returns. Understanding why your risk tolerance matters is vital to ensuring your investment strategy is suitable for your own circumstances and objectives.

Psychological Aspects: Gains and Losses

Firstly, the psychological dynamics of gains and losses are pivotal in comprehending risk tolerance. Behavioural finance emphasises that individuals experience the emotional impact of losses significantly more than the satisfaction derived from equivalent gains.

This disproportionate reaction shapes investment behaviour, prompting a tendency towards risk aversion. For example, you may opt for more conservative strategies, favouring the preservation of capital over the pursuit of higher returns, even when opportunities for substantial gains exist.

Moreover, this aversion to losses creates a psychological barrier that goes against rational decision-making in investments. Investors’ responses are often influenced by the emotional weight of possible losses, leading to a preference for safe or familiar investment avenues. Consequently, this bias can limit their ability to capitalise on opportunities that might present higher returns, resulting in a less diversified portfolio.

Recognising this inherent psychological inclination is essential in developing a balanced investment approach that aligns with your risk tolerance, ensuring you benefit from a more informed and strategic investment strategy.

Types of Risk

Investment decisions are influenced by various types of risk. Market risk, also known as systematic risk, is the inherent volatility of financial markets, influencing the value of investments. In essence, this type of risk is, in almost all cases, not possible to avoid. By acknowledging and comprehending market risk’s influence, you can employ strategies to hedge against its impacts and optimise your portfolios. For example, diversification across various asset classes and geographic regions can partially mitigate this risk, aiding in stabilising portfolio performance in times of market volatility.

On the other hand, there is also unsystematic (or ‘specific’) risk. This pertains to risks inherent to a particular asset or sector and thus is easier to avoid. For instance, company-specific risks might include management changes, product recalls, or takeovers. Sector-specific risks could stem from regulatory changes or shifts in consumer preferences affecting specific industries. Whilst diversification can help mitigate unsystematic risk to an extent, it cannot entirely eliminate it. Strategies such as asset allocation and thorough due diligence are vital in mitigating this risk.

Inflation risk arises from the erosion of purchasing power due to a rise in the general price level of goods and services. Investments failing to outpace inflation may result in diminished real returns. Strategies to mitigate inflation risk involve investing in assets with returns exceeding inflation rates, such as equities, real estate, or Treasury Inflation-Protected Securities (TIPS).

Political risk stems from changes in government policies, geopolitical tensions, or legislative decisions impacting investments. Diversification across regions and sectors, investing in stable economies, or utilising hedging instruments like options or futures can help mitigate political risk.

Concentration risk emerges from an overexposure to a particular asset class, sector, or individual investment. This commonly arises from an Employer’s reward scheme whereby an Employee is given shares as a bonus and thus over time the Employee builds up a large concentration of their assets in one Company’s shares. Diversification across various asset classes and industries can mitigate this risk. Additionally, implementing risk management techniques like setting investment limits or employing stop-loss orders can help control exposure to concentration risk.

Indeed, there are many other types of risk, click here to see our previous article explaining many of the most common types of risk you may encounter.

Your Risk Tolerance

Understanding your risk tolerance requires introspection beyond financial considerations. Factors such as life stage, personal circumstances, and individual temperament significantly influence risk tolerance.

For instance, if you are nearing retirement, you might prioritise capital preservation (lower risk) over aggressive growth (higher risk) due to a shorter time horizon and a lower capacity to recover from potential losses. Conversely, if you are beginning your career or are a younger investor, you might have a higher risk tolerance and seek higher returns whilst accepting increased volatility (risk) for long-term wealth accumulation.

Furthermore, risk tolerance isn’t static; it evolves over time. Changes in financial circumstances, market experiences, or personal life events can influence your risk appetite. Being young doesn’t necessarily mean you will have a higher risk tolerance, whilst being nearer retirement does not necessarily mean you will have a lower risk tolerance. 

It’s about regularly reassessing risk tolerance ensures that investment strategies remain aligned with evolving financial objectives and emotional comfort levels. Partnering with a Patterson Mills Financial Adviser will provide valuable insights and guidance in navigating the complexities of risk tolerance assessment, facilitating a more informed approach to investment decision-making.

Getting You Where You Want to Be

A comprehensive evaluation encompassing financial goals, personal circumstances, and emotional resilience can allow you to forge a balanced and well-suited investment strategy. Fortunately, this is exactly what Patterson Mills are here for; forming an investment strategy that suits your individual circumstances, objectives and risk tolerance. So, get in touch with us today and book your initial, no-cost and no-obligation meeting, you will be pleased that you did. Send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all information within this article has been prepared for informational purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

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Investments

Secrets of Wealthy Investors: How They Beat Investment Risks

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Secrets of Wealthy Investors: How They Beat Investment Risks

“Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business” — Peter Lynch

3 min read

Secrets of Wealthy Investors: How They Beat Investment Risks

“Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business” — Peter Lynch

3 min read

Whilst investing offers the perceived promise of financial growth and security, it also comes with its own set of challenges and uncertainties. At the heart of this financial adventure lies the concept of investment risk, an ever-present companion that can shape the outcome of your financial future.

Investment risk is not a monolithic entity; rather, it encompasses a diverse range of factors and variables that can influence the performance of your investments. Whether you’re a seasoned investor or just starting to explore the world of finance, understanding the intricacies of investment risk is paramount.

In this article, we’ll take you through the world of investment risk so that you can gain a deeper understanding of the risks that accompany investments and the tools to make informed decisions to protect and (with careful planning!) grow your wealth.

Considering Investment Risk

Market risk is what most investors “see” and is therefore most easily understood. Market risk is a systemic risk, with the risk being that a chosen investment loses its value due to economic events that affect the entire market.

Not all risks are necessarily “bad”: it depends how it is transposed into the real world as against the make-up of your investments at any given time.

Below you will find the main types of market risk.

Equity Risk

Equity risk pertains to the investment in shares. The market price of shares is volatile and keeps on increasing or decreasing based on various factors. Thus, equity risk is the drop in the market price of the shares at moments in time where adverse market risks have occurred.

Interest Rate Risk

Interest rate risk applies to the debt securities such as Government or Corporate Bonds. Interest rates affect the debt securities negatively i.e., the market value of the debt securities increases if the interest rates decrease.

Currency Risk

Currency risk pertains to foreign exchange investments. The risk of losing money on foreign exchange investments because of movement in the exchange rates is currency risk. For example, if the US dollar depreciates to the Swiss Franc, the investment in US dollars will be of less value in Swiss Franc. The converse is true should the Swiss Franc depreciate instead.

Volatility Risk

This is the risk-reward measure in securities comparative performance. Traditionally, higher returns are generated with higher swings in asset values of time (i.e. of a greater standard deviation measured over a given period). The price / value swings over time are generally of a greater standard deviation mathematically for the greatest returns.

However, real value is found in identifying returns from investment mixes that provide returns that are over and above that which is applicable on average for the standard deviation of that mix. This combination would mean the returns are generated by higher quality management, whether through investment selection and diversification, lower cost base or a combination of these factors.

Inflation Risk

Rising prices of goods and services, ‘inflation’, eats away the returns and lowers the purchasing power of money, literally as if it goes up in smoke! The return on investments needs to be greater than the rate of inflation for an investor.

Cash deposits are often paying interest at a rate close to (or often below) current inflation. This means the future buying power of existing cash deposits will quite probably be less in future years.

The most likely way of avoiding inflation risk is to take a long-term approach to money and invest anything over and above short-term needs not already covered, into real assets. These are assets such as:

  • Real property – commercial in nature, accessed by way of REITS, OEICs and listed property entities (e.g. Land Securities)
  • Government or Corporate bonds
  • Alternative investments, potentially including absolute return funds, hedge funds and private equity
  • Commodities (using financial Options, with an active approach to use of ETF / ETN funds)
  • Equities (listed company shares)

Other Outlying Risks

There are a plethora of other types of risk. Seeking to be as succinct as possible, these risks include:

  • Liquidity risk
  • Concentration risk
  • Credit risk
  • Re-investment risk
  • Horizon risk
  • Longevity risk
  • Foreign investment risk

Management and Control of Risk

Despite the risks involved with investing money, here is how these risks can be managed and controlled within reasonable parameters. The key methods of managing risks include:

Diversification

Diversification includes spreading investment into various assets like stocks, bonds, and real property. This helps an investor gain from other investments if some do not perform over a period. Diversification is achieved across different assets and also within the assets (e.g., investing across various sectors when investing in property types or specific equities, for example) and investment managers.

Monitoring, Reviewing and Updating

The monitoring is vital, as part of the ongoing assessment as to the validity of the investment strategy decided upon at outset.

The reviewing is a key part to ensuring that both the investor’s financial objectives, the financial performance and outlook remain aligned as expected and, if not, examining why and confirming what actions should be taken to address any shortcomings.

The updating is necessary to be cognisant of any changing objectives, implementing amendments to the asset mix, risk levels or investment selections as agreed from the outcome of each review.

Investing for the Long Term

Long-term investments provide higher returns than short-term investments.

Although there is short-term volatility in the asset values of real investments, history shows that, as compared to cash, the gain when invested over a longer horizon (5, 10, 20 years or more) have been far in excess of both cash and price inflation.

The longer the time horizon, the more likely it has been shown for the invested funds to create excess returns for the investor. Time horizon is a key factor in the decision as to how to split your investment portfolio between the broad asset classes. It is important to note that each asset class has a plethora of sub-asset classes.

Your Financial Success is Our Priority

Navigating the complexities of investment risk requires not only knowledge but also guidance. It is here that Patterson Mills stands as your steadfast partner on the path to financial security. Our expert team is committed to helping you make informed investment decisions, mitigate risks, and secure your financial future.

Don’t let uncertainty hold you back from realising your goals. , get in touch to book your initial, no-cost and no-obligation meeting. Or, send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.