Investment Facts ‘v’ Opinions
Following our series of Investment Policy Statement, 4 Great Reasons you want one, we continue with understanding your investment decisions which are influenced by two factors: information that is factual and information which is based on opinion.
The value of your equity-based investments today, whether they be pensions, unit trusts or other collective investments is a historical fact based on share prices on the date of valuation. The value of your investments tomorrow is an unknown quantum because the future value of equities is uncertain and your capital is at risk.
Markets are moved by news and news, by definition, is unpredictable and therefore random. Extensive studies based on the original “Random Walk” theory first discussed by Louis Bachelier in 1900, have found overwhelming evidence to support the view that the behaviour of stock prices is indeed random. Whilst the reactions of investors to events may be logical or emotional, well-informed or irrational, news is always unpredictable.
Therefore, share prices tomorrow may rise, fall, or remain about the same but the only certainty is that the outcome is uncertain. Therefore, your assessment of the suitability of an investment must be based on the degree of uncertainty you are prepared to face at any one time and the extent to which you can risk capital.
The future value of a portfolio primarily invested in Fixed Interest or Cash is still an unknown quantum because movements in interest rates will affect its value. However, being less volatile, returns are more predictable. Interest rates may remain the same, fall or rise, but in building your own portfolio you need to determine whether removing uncertainty about future investment performance is the right decision for you. If so, tempering your exposure to equities by the use of cash and fixed interest will remove some of that uncertainty, but you will need to accept that expected returns will be lower.
Investors who treat the opinions of others as if they were facts, however compelling they might sound, may well suffer serious consequences. What matters is: your assessment of the amount of risk you can tolerate. Our objective is to provide you with information, a means of assessing risk and, ultimately, the means for the removal of uncertainty. In order to do this we must first distinguish between facts and opinions and, having done so, provide you with a decision-making process that treats each according to its merits.