Investors’ Perceptions Of ‘Risk’


We have been reviewing a number of new clients’ views of ‘risks’ and these sometimes make very interesting reading. We all have to start from the premise that there is risk EVERYWHERE. Nothing in life is risk-free but what matters is how you define it, recognise it and then manage it. However, the concept that one asset class is riskless is very disturbing and that is yet again, residential property.

What confounds us sometimes is when a risk questionnaire is completed and the investor says that they are not prepared to tolerate anything other than at least returning 100% of their starting capital level but they can have hundreds of thousands of pounds in residential property or holiday property aside from their main home. Indeed, often too they have chunky mortgages against some or all of this – gearing-up their returns and that isn’t ‘risk’?

Just because something appears to have ‘gone up’ for a very long time neither means it still will nor that it is not risky, especially having all or most of your money in the one asset class. When that asset class (houses) is also so ludicrously over-priced on almost any criteria you may care to consider, let alone longer-term equilibrium charts, the risks can be very, very significant. This article is not even trying to make a view but simply is trying to ensure that if you have residential property as an investment, you understand that you could lose 50% of your investment value and if you don’t believe that could happen, you are either deluding yourselves of the risks or certainly should not be anywhere near that asset class. The other risk is that you may think you can walk away but have you ever tried to sell an illiquid asset that others are not keen to buy? What value is that property then – and with perhaps no rental coming along either as you are trying to sell it, still having to pay holding costs like Council tax and insurance, maintenance charges and utilities… by all means use residential property as an investment but do not kid yourself that there are no risks and especially at the moment with prices continuing to be so buoyant. Remember too, interest rates are at rock bottom but there are still economic risks ahead – what if the UK has to ratchet-up rates to protect the Pound (eg Turkey at 10.25% at the moment)? What would happen to property then? Please don’t say ‘it can’t happen’ because it can, even if it is very unlikely but just recognise the RISKS and then rationalise your view of other assets and recognise that to secure the optimum returns you must take sensible risks as there is risk with everything, including rising from bed in the morning.