Risk & Reward

Risk and reward are related

Evidence from investors and academics points to one undeniable conclusion: returns come from risk. Investment rewards are rarely accomplished without taking a risk, but not all risks carry a reliable reward. Everything we have learned about expected returns in the equity markets can be summarised in three dimensions:

Shares are riskier than bonds. 

In turn they offer higher expected returns as a reward.

Small companies have higher expected returns than large companies. 

This makes sense because small companies are more of an unknown quantity.

Lower priced ‘value’ stocks offer higher expected returns than higher priced ‘growth’ stocks. 

A value stock is one that is out of favour for one reason or another. The level of exposure to these areas will determine the risk and reward.

These charts show the benefit of risk premiums over various time periods. Illustrating while we might want to invest in great companies, the most successful companies aren’t always the best investment.

In Australia, this chart shows the benefit of risk premiums afforded to the value index over the last 30 sum years:

And over the same time frame, this US chart shows how small risk premiums have delivered:

The small and value premiums are not always present, that’s why they are called ‘risk’ factors. However, as the charts show, they are more likely to be rewarded. And they are available to investors if they stay disciplined over the longer term.

At Schuh Group Wealth Advisers, we understand the risks worth taking.

Diversification reduces Investment Risk

Investing without diversification is exposing yourself to unnecessary risk. Avoidable risks are holding too few securities, speculating on specific industry sectors or countries and following the predictions of others. These are risks that don’t provide a reliable reward.

By spreading your investments across different types of asset classes you can build a portfolio for all conditions. This is because while one asset class is performing poorly, another may be doing well. This is not to say diversification is complete protection, but it is insulation to reduce the volatility in your portfolio.

At Schuh Group, our clients’ portfolios are broadly diversified across asset classes such as shares, fixed interest, real estate and cash.

But the diversification doesn’t stop here. Shares, fixed interest and real estate are further diversified according to size and geography.

These aren’t a handful of direct investments in individual companies, bonds or real estate trusts. These are investments into funds which encompass thousands of companies and bond maturities.

A Schuh Group portfolio may hold upwards of 5000 individual companies across Australia and the world. Your fortunes are never riding on the performance of one company, one sector, one country or one asset class.

After all, who can really predict what will happen next? This chart shows the highest and lowest returns from each asset class from 2003 – can you see any pattern?

At Schuh Group, we build diversified portfolios that are structured to capture returns and minimise risk.