Risk aversion harms investments

Risk aversion is hitting investors’ wealth, F&C has warned, after just six per cent of 3,000 survey respondents said they would be attracted to high returns at higher risk.

Asked what would most attract them to an investment, nearly 30 per cent said total capital security, with almost 40 per cent choosing a good rate of interest.

"This means 70 per cent have essentially dismissed equity investment at the outset," said Jason Hollands, F&C’s head of corporate affairs.

While a regular income was valued by 13 per cent of respondents, fewer people – just six per cent – said they would be attracted by higher potential returns but with some risk of capital loss.

Only 6 per cent said they would take more risk with investments for their children than they would with their own investments.

"In fact, for those who can accept some risk to their capital, an investment in equities on behalf of a small child may have more time to grow and recover from any short-term market moves than an investment one might make for oneself," Hollands added.

Overall, only about one-third of respondents agreed that the stockmarket offered better long-term growth and/or income potential than cash deposits.

The views come in spite of data that suggests the opposite is true; the latest edition of the Barclays Capital Equity Gilt Study indicates that even over a holding period of just two years, shares had a 66 per cent chance of outperforming cash.

Looking at longer time horizons, over five years there was a 75 per cent chance of shares doing better than cash, rising to 90 per cent over 10 years and 99 per cent over 18 years.

"Of course there is a place for cash as part of an overall investment strategy: a 'rainy day' fund, for example, can help you avoid having to sell investments at an inopportune time in order to meet an unforeseen expense," Hollands continued.

"But by refusing to consider any investment that offers the risk of some capital loss alongside the potential for greater gains, people are opening themselves up to the eroding power of inflation, as well as sacrificing the chance of genuine capital appreciation."