Right now, some may wonder if they can get all the rewards of investing without any of the downsides.
By this, they may mean they do not want to experience market declines but still want to get a return.
Can you do this?
Now what I am not going to do is lie and say such things do not exist. The simplest way to limit the downside on an equity (stocks & shares) portfolio is to mix in some bonds. There are arguments for and against bonds, but they have historically protected investors during market shocks. Identifying how much each of our clients should hold in bonds is a key part of our advice process. What we make clear is that reducing the amount invested in equities also reduces expected returns.
That seems a bit too simple. Is there anything more I can do?
Investments exist that claim to get the same return for less risk or more return for the same risk. Active management, hedging, alternative asset classes, structured products, all claim to do this. In reality, what they might do is turn one type of risk into another. An example is converting volatility (the ups and downs of the markets) into liquidity risk (not being able to get your money out when you need to). Another thing the providers of these investments design them to do is to make them money.
Currently, the airwaves are flooded with shows about how con artists have managed to convince normally intelligent people to commit large amounts of time and money to what ended up being thin air. The most famous recent financial con artist was Bernie Madoff. Some of the wealthiest people in America lost billions investing in his Ponzi scheme. These people were obviously not stupid. Most were just unaware they could not have their cake and eat it. But this story was exactly what those investors bought.
Now, this is not to say every advert for an investment offering higher returns for less risk is a scam. However, the evidence suggests such investments are likely to destroy wealth over the long term. The only people who are guaranteed to make money out of them are those running and selling them.