No one wants to see investment losses and people do their best to avoid them. But the difficulty is how to avoid losses without reducing risk so much that your investment doesn’t deliver a real return.
Eoin Corcoran of Davy explains that the first thing to understand is the definition of a loss which he describes as “a permanent loss of capital”. In other words, money that you are never going to get back. But if the value of equities goes down one day you have only lost that money if you actually sell the stocks on that day. If you hold onto them, they may well recover in value and your loss disappears.
According to Corcoran, the best way of minimising the risk of even these short-term apparent losses is by investing in a diversified manner and selecting a strategy that you can stick with for the medium to long term. “Rather than having an overall level of risk and being invested accordingly we find better results are achieved for clients when we work with them to split out different goals and match them to specific investment strategies.”
When it comes to locking in the value of your investments, George Flynn of Smith & Williamson says this is difficult but there are options. “There are capital-protected funds which allow you to participate in the upside with a level of downside protection,” he points out. “But we wouldn’t recommend putting all your money in such products. There are other products which also include protection.
“You can look at investments that are linked to inflation,” he adds. “If you look hard enough you can find inflation-linked bonds out there to suit you. But there is currency exposure in a lot of cases and you have to bear that in mind. There are certain other assets such as infrastructure funds which co-invest in government project like tool roads. You can have investments in things like UK NHS hospital trusts. They are government backed and can offer inflation-linked payments. They are also traded like a share so they are very liquid assets.”
PwC’s Munro Dwyer warns against an over-cautious approach. “The easiest way to protect capital in a turbulent market is not to invest,” he points out. “This will preserve the current value of your capital but inertia can set in if you do that and it’s difficult to resume a more positive strategy. In the end, if you are going to take risk take lots of little risks and diversify across the traditional asset classes as well as new areas such as private equity, absolute return and so on.”