With investing, there’s one thing that you should know: risk and reward are related. Evidence from investors and academics points to one undeniable conclusion: the higher the risk, the higher the returns. Investment rewards are rarely accomplished without taking a risk. What scares people is the fact that not all great risks are assured a great reward.
Everything we have learned about expected returns in the equity markets can be summarised in three dimensions:
Shares are riskier than bonds. But they do offer higher expected returns as a reward.
Lower priced “value” stocks offer higher expected returns than higher priced “growth” stocks.
A value stock is a stock that is out of favour for a particular reason at that point in time.
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 Milestone Financial Planners, we not only know, but we fully understand the risks that are worth taking.