Manage the Risk and the Money!

Investors in equity markets have, on the whole, enjoyed strong returns since March of 2003 as prices have recovered from the vicious “Bear” market which began in 2000. Some market commentators believe this recovery is merely a pause in a longer term decline, not an investment view we share, but nonetheless markets will not continue to rise at the rate enjoyed since 2003 indefinitely. The painful lessons drawn from the “Bear” market are valuable ones and should not be forgotten.

It’s a scenario that unfortunately becomes all too familiar to many investors when “Bull” markets, especially in equities, finally run out of steam or pull back during a consolidation phase.

A smiling investment manager explains that “relative to the benchmark” your growth or balanced portfolio has out-performed by 5%. The dilemma is, the benchmark is negative and is in double digits! This scenario may well arise simply because, whilst a benchmark had been agreed, the responsibility for adjusting the benchmark to reflect market or economic conditions was not addressed. Consequently the investment manager might argue that their objective, performance over and above the agreed benchmark, has been met even though the portfolio has fallen in value.

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