Recently, Clover was included in the above article with the headline: “Desperate deposit savers turn to risky strategies”. While some of the other investment strategies mentioned in the article are extremely risky — specifically speculative stocks and margin trading — Clover is absolutely not on that same risk scale.
Essentially, the article is comparing Apples to Oranges… where the Apples are well researched, professional investment advice *ahem, us* and the Oranges aren’t too different from gambling.
At Clover, we take an especially in-depth approach to matching each client with the appropriate risk level. Here’s more about our process and approach.
Risk and Reward
You’ve probably heard people say “risk equals reward”. But in investing, that’s just half the story. Yes, risk and reward are linked, but only to a certain point. For example, if you wander down to the casino, there are lots of games with high risk that are clearly not worth the potential reward. The same is true in investing.
All investments have some degree of risk — the key is knowing the right level of risk, and only taking calculated risks that give the best pay-off over time.
So… what is Clover more or less risky than?
Let’s compare the risk in Clover’s Portfolios to other investments.
Clover is less risky than investing in individual shares. With individual shares, you may experience market movements that can wipe out a huge percentage of your investment (Remember Enron?). And even though you’re taking on more risk, it’s not worth the reward: last year the average investor ended up 4.7% behind the relevant index.
Clover is less risky than investing in property using high leverage. Buying property using high leverage (i.e. a high Loan to Valuation ratio) is great during times of rising property prices. But it also magnifies losses if property prices drop.
Clover is way less risky than “speculative stocks” or products that allow you to borrow to buy shares. Again, leverage magnifies your losses — you can even lose more than you invested.
Clover is more risky than keeping money in a Savings Account. When you keep your money in a savings account, you won’t experience market movements up and down. However, you are exposed to a different kind of risk, the risk that your money doesn’t even keep up with inflation (more on that below)
Different risk for different clients
Everyone has different goals for their money. And different goals often mean different investment approaches. For example, an investor saving to purchase a house in three years likely needs a different portfolio than an investor saving for retirement in thirty years. Additionally, investors need to be comfortable enough with their portfolio to hold through times of temporary loss.
That’s why we recommend different risk profiles to different clients, based on their answers to our risk questionnaire. If you’re curious you can try it out here. The recommendations are free and there’s no obligation to invest.
Our recommended portfolios vary from conservative (80% bonds, 20% shares) to aggressive (10% bonds, 90% shares), and include a minimum recommended investment timeframe. Essentially, the more aggressive your risk appetite is, longer the minimum recommended timeframe for the investment. Longer timeframes give you the best chance to recover from sharp market declines such as the Global Financial Crisis.
What does history show?
Looking at 20 years of historical performance, we can see how diversified portfolios respond through all market cycles — including bull markets, bear markets and drastic events like the 2008 Global Financial Crisis.
Here are the numbers:
As you can see, the more aggressive the portfolio, the higher the highs and the lower the lows. The longer you’re investing for, the more likely you’ll be happy to be more aggressive (i.e. higher risk/return portfolio), and hold your investments during temporary downturns. It took nearly three years for markets to recover after the Global Financial Crisis, but investors who held during that time were rewarded.
The risks of not investing
Just like there are risks to investing, there’s a risk in not investing. As Warren Buffet famously wrote:
“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”
If your money is sitting in a savings account, there’s a very real possibility that it’s not keeping up with inflation — and is thus losing value. You won’t see your account balance move backwards, but you will notice that what you are able to buy with that money reduce over time.
If you’re saving for something like a home, then you already know the feeling. With prices going up, investing is one way have your savings work harder for you.
Clover is a young company — what happens if you guys disappear? Will clients’ money disappear too?
No. Every account is held in our client’s own name. So if something were to happen to Clover, our clients’ investments and money is directly accessible to them. Not all advisors are structured this way — it’s an extra precaution we take because we know how important security and peace of mind is to our clients.
Investing smart means understanding risk
The bottom line is to know and understand the risks involved with investing. You can’t, and shouldn’t avoid risk altogether. Large investment companies spend a lot of time understanding the underlying risks of any investment. They set clear rules on the level of risk they are willing to take and then try and maximise the level of return for the given level of risk. At Clover, we use the same investment approach and techniques as used by the some of the largest investors. Collectively, the Clover investment team has experience in managing hundreds of billions of dollars at some of the largest investment companies around the world.
By investing with an approach like Clover’s — specifically with a diversified portfolio and the appropriate time frame — you can make risk make work in your favour on your path to growing wealth.
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