By now most shops have discounted the price of Easter eggs in an attempt to quickly clear the shelves of the last remaining stock. What was a top selling item for the last week or 10 days has quickly become unwanted stock. Chocolate eggs can often be bought at discounts of up to 90% when compared with their price a few short days ago.
This reflects a number of phenomena which are also seen in investment markets – the impact on asset prices of “supply and demand” being the more obvious one but also the high risk associated with a lack of diversification – all the eggs shouldn’t be in one basket! Other elements such as pricing bubbles, market timing and the slightly more unusual “behavioural” components are also in evidence.
Shop owners know that in the main, people will buy chocolate bars and sweets all through the year but will generally only buy chocolate eggs in the run up to Easter– understanding this behavioral trait enables shop owners to prepare accordingly. Yet most shops will still either have an oversupply or a shortage of specific chocolate eggs – proving that even knowing how a market is going to perform doesn’t necessarily mean you can maximize returns (or avoid losses) from that market. We know Equity markets, Bond markets and Property markets generally perform in certain ways but investors still regularly get caught out when markets fall.
Financial Advisers, such as ourselves in HC Financial, strongly advocate diversification as a means of reducing the likelihood of significant falls in clients’ savings and pension funds. If you invest in a single asset class, you will be very exposed if there is a significant fall in that asset’s value. If you invest across asset classes you reduce the likelihood of that happening. We use a series of multi-asset model portfolios – investment funds that are spread across a wide variety of assets and geographical regions globally. The mix of assets is determined by the level of risk that the particular fund is prepared to take which also impacts on the level of return the fund is expected to achieve.
So what does that actually mean? It means that in broad terms the level of return you are going to get from your chosen portfolio over time and the likelihood of losing money over time can be predicted – it doesn’t remove the chance of losses but it reduces the level of uncertainty. Portfolios at the lower end of the spectrum will experience lower returns and less likelihood of significant losses than those at the higher end – clients choose a risk/reward level according to their needs and have the comfort of knowing (in broad terms) how their investment/pension will perform.
When the chocolate feast is over and when the Easter egg boxes have all been recycled it is well worth having a look at your pension and any savings or investments and making sure that they are structured in a way that will meet your needs.
HC Financial...we advise.
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