23/05/2019 0 Comments
Why are equities volatile?
The more experienced investors among us will know that investing in equities involves a more volatile journey than some other asset classes, such as fixed income.
What causes this volatility?
When you invest in a bond, you are effectively lending money to the issuer, either a company or a government. In return, you receive a set interest payment and you should get back your principal investment (ie. the face value) once the bond matures (as long as the issuer does not default).
Investing in a share means you are buying a small piece of the underlying company. The value of your holding should be based on the future cashflows it earns. As such, the share price is subject to a range of positive and negative factors which may affect what those cashflows will be worth.
Investors are always looking to the prospects of a business, and the ability to value a company is not a precise science. Therefore, share prices react to new bits of information as they become available. Other sources of volatility include changes that may occur in their industry or the national and global economies in which they operate.
As companies grow the opportunity for equity investors is very attractive, but the periods of volatility are unavoidable.
Know your attitude to risk
The Omnis investment team builds portfolios in line with a client’s attitude to risk. Our portfolios provide exposure to different asset classes (equities, bonds, alternatives and cash) that have been chosen based on their potential ability to beat inflation over time, but we can also blend them together to create particular characteristics over the longer term.
Portfolios with a higher allocation to equities experience greater volatility. However, you should get rewarded for the extra risk as shares typically generate superior returns compared to most other asset classes (if you stay invested of course). But if you struggle to withstand short-term drops in value, then your portfolio should be weighted towards cautious assets like bonds.
When you invest in the auto-rebalancing Openwork Graphene model portfolios or our actively-managed Omnis Managed Portfolio Service, you can choose a portfolio suited to your risk profile. The main difference is the allocation to equities - as the name suggests, Adventurous has the highest weighting while Cautious has the lowest.
Volatile [adjective] - liable to change rapidly and unpredictably, especially for the worse: eg, the political situation was becoming more volatile.
To find out more about the asset allocation within your portfolio, please get in touch.
Regardless of what asset class or portfolio you invest in, the value of your investment and any income from it can fall as well as rise. You could get back less than you invest.
This update reflects Omnis’ view at the time of writing in April 2019 and is subject to change.