XTB CEO Richard Murphy looks at balancing risk and return in your investments
There is always a trade-off between risk and return
The more return you receive on an investment will inevitably mean the more risk you incur. There is no such thing as a high return low risk investment. Bonds are low risk low return investments. Equities are high risk and can sometimes be high return, but not always.
Corporate bonds are the next cab off the rank in terms of low risk low return. Moving up the spectrum you get equities, hybrids and even further up the scale, warrants, options, CFDs and other derivative type investments. Products which are potentially very high risk but potentially very high return. It is really important to think about where on the spectrum you want to be positioned. You do not want to have all your eggs in one basket.
Defensive assets tend to be very low volatility whereas growth assets tend to be much higher volatility. Over the last 20 years the average volatility of equities has been around 15 – 16% p.a.
Fixed rate bonds, on the other hand, have had an annualised volatility of around 2 – 3% and floating rate bonds around 0.5%. Equity hybrid securities are in the middle at around 7%. So in a balanced portfolio you should have a mixture of more volatile growth assets and less volatile defensive assets.