Do You Truly Know Your Risk Appetite? You Might Be More Conservative Than You Think

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Even the most determined optimist has to admit that the world has gone crazy lately. With the pandemic showing no signs of ending and Russia attacking Ukraine, the markets have been thrown into turmoil.

CNN’s Fear & Greed Index reading shows that the market is being driven by extreme fear right now, which is pretty much the emotion that I feel every time I scroll through my newsfeed. Global stock markets have plunged following the Russian invasion of Ukraine, and oil seems to be the only thing whose price has shot up, which is not great as it could translate to a higher cost of living.

Being relatively sheltered in Singapore, we’re thankfully shielded from the more tangible aspects of the war, and might still be trading as usual. But psychologically, we’ve just been through two very hard years.

Chances are, your risk appetite may have changed without you knowing. Unbeknownst to you, anxiety about the state of the world is making you more conservative than you think.

 

The different types of investors

Investors can be divided into three groups depending on their risk appetites — growth, balanced and conservative.

Growth investors have a relatively high risk tolerance, and their priority when investing is to pursue growth opportunities. They are usually young and thus have lots of time to ride out market volatility.

Conservative investors are the opposite. They are risk averse and tend to prioritise preserving their existing capital rather than seeking higher growth. They might be older or do not have a very long time horizon to achieve their investment goals.

In between the two are balanced investors. These are investors who are interested in growth opportunities but are also somewhat protective of their existing capital.

Of course, these are just archetypes, and might not apply wholesale to individuals. We might feel more risk averse when investing in certain types of assets, or be somewhere in between two of the three categories. Regardless of age and time horizon, turbulent market conditions might turn some of us into more conservative investors.

However, whether you’re a textbook example of one of the archetypical investors or completely unique, it helps to understand your risk appetite because self-knowledge leads to smarter investment decisions. 

 

Has your risk appetite changed?

For some investors, recent world events have been a wake-up call to acknowledge that their risk appetite may be more conservative than they thought.

Here’s a scenario that might sound familiar to you. In late 2020 and 2021, markets were actually quite robust as global economies started to recover. At that time, many investors were focused on achieving good returns and overestimated their risk appetite. Normal, right? After all, everyone feels brave when markets are rising.

This caused many investors to take on higher risk without really understanding the implications. You see, there’s something called the Risk-Return Tradeoff, which associates the higher risk of larger short-term losses with higher long-term returns and vice versa. Basically, where risk level is proportionate to reward.

Then, when market pullbacks happened, investors panicked and ended up bailing when their portfolios started generating losses. They were panic-selling, which according to research, doesn’t pay off. This is because making the actual trade (i.e. panic-selling) turns your paper loss (unrealised till you take action) into actual loss.

Studies have shown that those that miss out on just 10 of the stock market’s best performing days could cleave your overall returns by over half, it’s still positive returns. In addition, 7 of the market’s best 10 days occurred within 2 weeks of the 10 worst days. The most important factor would be to stay in the market rather than focus on timing the market.

This shows a couple of things: Long-term investors who stayed the course during short-lived crises (just see the historical performance of a large cap index like the S&P 500 from inception till now, noting the years of recession) reaped the most rewards; and it’s better to leave paper losses be than to turn them into reality.

 

Consider this more conservative investment option

Here’s a hypothetical scenario: Your portfolio starts falling, and falling, and falling… How much can you continue to watch it fall till you freak out and quickly sell it off? This might indicate how much risk you’re able to stomach.

During the Great Financial Crisis of 2008, between September to November of that year, stocks fell over 31% — almost a third of value lost in just 3 months! That means someone who invested $60,000 in a stock portfolio would see a $20,000 paper loss… is that something you would be able to stomach and continue holding onto your investments for dear life?

If you’re rethinking your risk appetite and looking for a more conservative way to invest, all-in-one investment platform Syfe has a few options that might suit you:

  • Syfe Core Balanced — Optimally-balanced portfolio of bonds, equities and gold for long-term growth.

  • Syfe Core Defensive — Low-risk portfolio aimed at stable returns. Invests mainly in high-quality bond ETFs, with some exposure to stocks and gold.

  • Syfe Cash+ — Alternative to cash savings with projected returns of 1.2% per annum. Cash+ is the only solution in the market to offer same-day withdrawals too! 

These Wealth portfolios prioritise defensive investments and are aimed at helping investors protect their capital in these turbulent markets. They are professionally managed and regulated by MAS, so don’t panic okay?

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Now, if you’re still wondering how to gauge your risk appetite, Syfe has an in-built Risk Analyser when you select your Wealth portfolio. A mismatch between your risk appetite and investment goals and your selected Wealth portfolio would trigger a notification that suggests a more suitable Wealth portfolio — choose to change your Wealth portfolio or stick with your selection.

Another way is to begin with a balanced Wealth portfolio. Your reactions to market volatility would probably inform your risk appetite. For example, if you keep checking your account balance daily and red numbers literally make you see red (or feel stressed), that might mean you could have a lower risk appetite. Do your fingers hover above the “sell” button when markets tank, or are you instead excitedly gathering more of your spare funds to buy more investments at a “discount”?

If you’re able to stomach losing 20% or 30%, you could have a higher risk appetite and can think about becoming more growth-oriented instead of defensive in the future.

Syfe also recently launched its Trade functionality, becoming what it terms as “Singapore’s first neo-broker”. Through Syfe Trade, you can trade US stocks from as low as US$1. For more advanced traders who prefer buying their own stocks or who want exposure to the US market, the low barrier to entry could reduce overall capital outlay.

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Traders can also build their portfolio with defensive US stocks like consumer staples, healthcare, and utilities, or consider using commodities to hedge against inflation.


Source

A bear market is not the time to go on a panic-selling spree. Traders can in fact make use of this market pullback to buy quality shares at a “discount” (make sure you don’t need this money now as the key is to HODL till markets normalise). Even those who are undertaking the dollar-cost averaging approach will benefit as they can buy more shares for the same amount of money now.

In addition, the investing options through Syfe don’t involve complex and confusing trading techniques or derivatives. This means that your loss is limited to your capital, and nothing more. However, that’s just the worst case scenario! Syfe’s wealth portfolios are monitored by a smart algorithm, as well as the eagle eyes of experienced investors who track the progress of the investments.

Syfe users who have access to Syfe’s in-house wealth experts can also get on a call with them, or join in the weekly AskSyfeLive events available to all.

Are you more conservative than you think? Consider adopting a defensive investment stance during these volatile times with Syfe. 

 

Disclaimer: This post was written in collaboration with Syfe. All information is for educational and informational purposes. Past performances are not necessarily indicative of future performances. Always do your own research before investing. This is not financial advice. All opinions are the author’s own. This advertisement has not been reviewed by the Monetary Authority of Singapore.