Investors, are you taking too little risk?

But a recent Tisco Wealth study shows that staying low-risk for too long might not be a good idea. 

     We looked at historical data for investment returns from each asset class in the past 10 years and found that returns from bank deposits and money-market funds usually did not keep up with inflation. Bt100 put in a bank account at the beginning of 2002 would have grown to Bt118 by the end of 2011. In the same period the cost of goods and services rose in line with inflation from Bt100 to Bt135. Bt100’s worth of short-term government bonds just kept up with inflation at Bt139, and a well-diversified bond portfolio did better at Bt159. Stocks, as risky as they may seem, have a proven track record of outgrowing inflation. Bt100 invested in SET index stocks would have become about Bt337 by the end of the 10-year period.

We went further, and computed the returns from various investment plans for different maturity horizons to help investors choose the right plan for their financial needs. For a one-year horizon, low-risk investments like bank deposits and short-term bonds may offer the benefit of protecting you from losses. In the worst one-year period, bank deposits yielded minimum returns of 0.56 per cent, while the SET index showed a maximum loss of 54 per cent in its worst year. However, you risk loosing your purchasing power with a bank deposit because it only has a 30-per-cent chance of yielding more than inflation in the same period.

For three-year investment period, a mixed portfolio with 20-30 per cent stocks is clearly a better choice. In the worst three-year period, a mixed portfolio yielded 1.49 per cent, better than any other low-risk alternatives. The chances of getting a return greater than inflation is also high, at around 80 per cent. 

In summary, risk is something that should be managed, not totally avoided. A good portfolio should be risky enough to provide returns that can at least keep up with inflation, while safe enough to protect your wealth from financial havoc. Conservative investors who have two to three years to invest should allocate 20 to 30 per cent to risky assets like stocks and commodities. More aggressive investors or investors who have longer horizon (like a 30-year retirement plan) can allocate more money to the risky portion to grow their wealth over the long run.

 

Komsorn Prakobphol is wealth manager at Tisco Asset Management. He can be reached via www.tiscowealth.com.