Podcast 8th April 2016
The traditional way of looking at investments is through the concept of Risk and Return. The higher the risk, the higher the return and lower the risk, lower the return. Risk is equated with the ability to take capital loss in search of profits and returns are commensurate with that ability.
Like in all other spheres of the world now, traditional ways of looking at investments have undergone a sea change. Low risk assets have become high risk assets, such as sovereign bonds. Countries are defaulting on government bonds, bond yields have turned extremely volatile and in many cases investors have to take loss to “Earn Fixed Income”. Bond yields in Japan and other European nations are negative leading to an anamoly of the word “Fixed Income”.
Low risk and low returns have stopped applying for Fixed Income markets.
Physical assets such as Real Estate and Commodities too have seen huge fluctuations in values over the last eight years. Gold has lost sheen and oil is no longer a scarce commodity. Risk in owning physical assets has gone up considerably and returns have actually dropped sharply. Higher risk and higher returns do not apply to physical assets any longer.
Equities too have seen the definition of low risk stocks and high risk stocks becoming corrupted. Low risk stocks were equated with strong cash flows and stable growth prospects while high risk stocks were equated with negative cash flows and prospects of unsustainability of high growth. In many markets, low risk stocks have delivered negative returns while high risk stocks have delivered consistent returns over long periods of time.
The Risk & Return equation has become unequal and no longer holds true in many markets. This is an important point to note for savers, who could see their financial goals become unreachable if they follow this investment concept.
Savers must take a relook at their investments, check what can deliver the best returns going forward and then weigh their assets accordingly. Each asset class whether equities, fixed income, gold and other physical assets must be weighed on what the future holds for their prices. Blindly investing based on a Risk & Return theory would prove to be quite detrimental to a saver’s financial health.
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