23.08 Liontrust Views Summer 2023 Literature (Single) - Flipbook - Page 13
investments
It is important to consider that there is a
trade-off between risk and return in a free
market – the greater the risk involved in an
asset class, the greater the potential return.
This trade-off tends to be more consistent
over time and across asset types. Cash
and government bonds are generally
considered to have the lowest risk but
both generate lower long-term returns than
equities, which lie at the other end of the
risk-return spectrum. In between these asset
classes are high yield bonds, which are
higher risk than most fixed income but lower
risk than equities.
shortfall of cash versus inflation on current
rates will only be exacerbated the longer
that investments are parked in savings
accounts that pay negative rates versus the
rate of inflation.
Cash can help to balance the risks and
reduce volatility, but there are many other
investment assets with the potential to
enhance long-term returns that investors can
include in their portfolios. The key issue for
investors is to ensure that the mix of assets
matches their own appetite for risk.
Having a diversified
portfolio broadens your
exposure to different
markets or sectors and
reduces the risk of being
hostage to the fortunes
of one or just a few
financial assets.
Matching appetites for risk
Having a diversified portfolio broadens
your exposure to different markets
or sectors and reduces the risk of
being hostage to the fortunes of
one or just a few financial assets,
while potentially achieving a
greater return on investment for the
same level of risk compared with
an undiversified portfolio.
This potential is particularly
relevant in today’s markets. The
attractions of cash deposits might
be more enticing than they have
been for a long time, but if investors
are concerned about preserving
and increasing the real value
(above the rate of inflation) of their
wealth then the current level of inflation and
interest rates means they should consider
diversifying into non-cash assets if they
are to have the prospect of doing so. The
Source: UK CPIH inflation rate in May,
Office for National Statistics
1
Source: Moneyfacts Compare.co.uk,
interest on accounts ranging from easy
access savings to 180-day notice accounts
2
LIONTRUST VIEWS – SUMMER
13
