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Investors don’t understand ‘traditional’ risk labels

Research conducted by YouGov on behalf of digital wealth manager Scalable Capital, has found a worrying trend among investors.

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Much has changed ten years on from the global financial crisis but an alarming number of investors still don’t understand the reality of investment risk, according to new research.

A an analysis of fund data and a survey shows that UK investors still don’t have a clear understanding of how much risk is in their portfolios with 70 per cent of investors saying they don’t expect a cautious portfolio to lose more than 10 per cent in a bad year.

The data, however, show something quite different. Over the past decade, the worst cautious/defensive fund lost almost 37 per cent of its value from its worst peak to trough, and the biggest cautious fund in the UK – which has a current AUM of over £3bn – lost almost 26 per cent from peak to trough.

The average cautious fund lost 16.9 per cent over this period and just one in ten funds lost less than 10 per cent, just 2 out of 20, according to FE data.

One in five UK investors, the survey also found, does not know the potential level of loss that they could experience in a ‘cautious’, ‘balanced’ or ‘aggressive’ portfolio.

The value of a fund can fall a lot more than investors expect. 71 per cent of investors thought that a ‘balanced’ portfolio shouldn’t fall more than 20 per cent per cent in a bad year. In reality, the 10-year data shows that the worst-performing ‘balanced’ fund would have lost 43 per cent had an investor entered the market at the peak and sold at the bottom.

Further analysis by Scalable Capital has also found that the actual level of risk among funds grouped in the same descriptive risk category can vary significantly based on a survey of 2,000 adults across Great Britain took part in the research.

Adam French, CEO at Scalable Capital, commented: “If investors don’t understand or over- or underestimate the risk of their portfolio, they may be in for a rough ride when the markets fluctuate. Our research shows that investors tend to sell their portfolios too quickly when the going gets rough.”

Scalable Capital, which has assets under management of over £300m, is one of the leading digital investment managers in Europe since its launch in Germany in February 2016 and in the UK in July 2016.

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Adam French

Co-founder and CEO

Scalable Capital

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