Volatility

Volatility is the standard measure used to describe the riskiness of an investment or portfolio of investments. Different stocks and assets have their own characteristics and one of these will be an average rate of return. The volatility of that stock gives the likelihood (historically derived) that the stock will provide a return in line with it’s average rate of return. The lower the volatility the more likely that the return will be close to the average.

The risk associated with higher volatility is that the value of an investment can change significantly (whether up or down) over a relatively short period of time. This means that the value may be below what is required if the money is called on. However, this volatility is just what is needed to provide the potential for good investment returns. So we must have some volatility to keep returns up but we also must keep volatility to a minimum to increase the likelihood of meeting our investment targets – this is typically known as the Risk vs Reward Trade-off.

In terms of volatility, good portfolio management consists of three key points:

    1) Ensuring that portfolio volatility is within individual client expectations
    2) Maximising returns for any given level of volatility
    3) Minimising volatility on short-term money

The starting point for constructing any investment portfolio is to identify the client’s attitude to risk. This then sets out which types of assets (e.g. shares, commodities, bonds) are broadly suitable and which would be inappropriate. The Investment Team can then start selecting individual holdings to tailor the portfolio to meet the client’s individual requirements (e.g. a sustainable income or high investment growth).

Click here to see the relative risk/reward characteristics of different asset types

This is just the beginning though as investments, economic conditions and, most importantly, the client’s needs and attitudes, all change over time. We recommend that portfolios are all monitored and reviewed regularly to ensure that they continue to meet client’s objectives and are behaving as expected.

To find out if you are getting enough reward for the risks you are taking or if you are taking unnecessary risks with your money contact our Investment Team today on (+350) 200 49750.