Francis Clayton (pictured below), Executive Director at Quilter Cheviot Investment Management in Jersey, on how the game of Monopoly explains investing’s most important concept
Do you understand investing? Most people I know would probably say no. They might understand when their investment manager or financial adviser takes them through a summary, but an unequivocal yes is unlikely when it comes to thinking of themselves as an investment expert.
Yet the most important part of investing – balancing risk and return – is something we do every day. Indeed, the best example of this is probably something you played regularly growing up. It’s Monopoly, the property trading game for players aged eight or over, which is still going strong in what is now its ninth decade.
In Monopoly, the more properties and houses you buy, the higher your potential return. But if you take too much risk, you become vulnerable to having to sell or mortgage your assets when you land on other people’s properties. Monopoly is a perfect example of trying to strike the right balance between risk and reward.
As an investor, you face a similar dilemma. The quickest way to grow your money is to take lots of risk, potentially allocating your entire portfolio to the highest-risk asset, company shares. But if shares perform poorly and fall in value, this is also the fastest way to lose money.
The dilemma of how to balance risk and reward is one that my clients frequently ask me about. So how do we get the balance right and make sure an investment portfolio is shaped appropriately?
Let’s turn our attention back to the Monopoly game. Each set of properties has advantages and disadvantages. The browns are cheap to buy and build on, but the rent on them is quite low. The dark blues are expensive to develop, but are more than capable of knocking a player out financially.
Which set you prefer ultimately depends on your financial situation. If you’ve conserved cash throughout the game, developing the greens looks like a smart move. You’ve got plenty of surplus cash, which you can’t do much with, and you might win the game if someone lands on your property.
Those who splash the cash early on might want a cheaper development option, making the light blues ideal, which gives them a chance to steadily build up their cash reserves. What you’re really doing here is judging risk and return and your best strategy for winning the game.
This is exactly what an investor does when they think about the balance of risk and return in an investment portfolio, though the objective in real life is to meet your financial goals rather than win a game.
Now, my Monopoly analogy isn’t perfect. There are 100 voices in my head telling me to caveat this piece and point out why investing is not Monopoly (there’s only one asset class in the board game and so on). To do this would be to get in the way of my broader point though – investing is about balancing risk and return, something the average person does surprisingly often in real life, when you think about it.
It is not inherently hard to understand investment concepts. The challenge is more often in the detail of whether something is a good investment or not. Occasionally, people change their mind about the balance of their investments. During the final three months of last year, for example, we saw an unusually fast drop in markets, which prompted several of my clients to decide that they actually wanted to take less risk in future. I reworked their portfolios and, while their returns are likely to be lower in future, they are happier with their portfolios overall.
Regardless of the mix of risk and return in your portfolio, it’s important not to change it too frequently. People who change the make-up of their portfolio in response to every change in markets tend
to buy high and sell low – the exact opposite of what you are supposed to do.
I would always suggest people take the amount of risk with which they are 100% comfortable, rather than being 90% comfortable and hoping any downturn isn’t too aggressive. After all, investing might be like Monopoly, but real life uses actual money.
Find out more
For further information, please visit www.quiltercheviot.com or contact:
Tel: +44 1534 506 070
Fax: +44 1534 768 108
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.
Quilter Cheviot (Jersey) Quilter Cheviot and Quilter Cheviot Investment Management are trading names of Quilter Cheviot Limited. Quilter Cheviot is registered in England with number 01923571, registered office at One Kingsway, London WC2B 6AN. Quilter Cheviot Limited is a member of the London Stock Exchange, authorised and regulated by the UK Financial Conduct Authority and regulated under the Financial Services (Jersey) Law 1998 by the Jersey Financial Services Commission for the conduct of investment business and funds services business in Jersey, and by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law 1987 to carry on investment business in the bailiwick of Guernsey. Accordingly, in some respects the regulatory system that applies will be different from that of the United Kingdom.
• This advertising feature was first published in the May/June 2019 edition of Businesslife magazine