Let’s start by tossing a coin. Assume you have £100,000 in savings. The bet is: heads, I give you another £100,000 and you’ve doubled your money; tails, you give me your £100,000 and you’re left with nothing. The coin is fair and each outcome has a 50% chance – would you take the bet?
If you say no, you would definitely be in the majority. Most of us feel the pain of losses much more than we savour the joy of gains, so even a completely fair 50/50 bet seems too much of a risk. Especially with money we have worked hard to earn and has taken a long time to accumulate.
So how can I make the bet more palatable? What if I toss 100 coins (all at once) and you are betting £1,000 of your £100,000 savings on each coin. In theory it’s still possible that every coin comes up tails and you lose all of your savings, but of course the most likely outcome is that 50 of the coins land heads, the other 50 land tails and you are left where you started with £100,000.
You also now have a 46% chance of being up on the bet (51 or more heads) and more than an 18% chance of being at least £10,000 ahead (55 or more heads.)
More importantly, the chances of 60 or more of the coins landing as tails (you lose) is less than 3%, which means you would have to be very unlucky to lose £20,000 or more.
(Finally, for the statistically minded, your chances of losing everything have gone from 50% to something in the order of 7.889 x 10-31, a vanishingly small number.)
It all starts to sound much more reasonable. In any venture involving uncertain results, diversifying across a range of ‘investments’ drastically reduces the probability of extreme outcomes and makes participation a much more comfortable experience. Put simply – diversification reduces risk, even when there is only one game in town.
In the real world of portfolio management, where the risks are not usually 50/50 and there is a huge range of potential investments, there are even more opportunities to diversify and even more benefits from doing so. A good portfolio manager will take advantage of the following:
Finally, don’t forget that, unlike tossing a coin, portfolio management is not a game of chance. Yes, investments can go down as well as up, but a professional wealth manager should be able to demonstrate they can deliver consistent results over a long period with a greater success rate than 50%. Does yours?
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Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’
portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.
David is responsible for spearheading the growth of our wealth management business across the company’s international jurisdictions. Prior to taking on his current role, David was integral in developing the bank’s investment proposition for high-net-worth individuals, trustees and investment consultants. He is also a member of the bank’s executive committee.
He has over 25 years’ experience working for global blue-chip companies in both London and Jersey, and providing investment solutions to a wide variety of clients around the world. Prior to joining Nedbank Private Wealth, David spent 15 years with RBC Wealth Management where he held several senior roles, latterly leading the investment business as managing director and head of discretionary investments in Jersey.
David is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.
David is responsible for spearheading the growth of our wealth management business across the company’s international jurisdictions. Prior to taking on his current role, David was integral in developing the bank’s investment proposition for high-net-worth individuals, trustees and investment consultants. He is also a member of the bank’s executive committee.
He has over 25 years’ experience working for global blue-chip companies in both London and Jersey, and providing investment solutions to a wide variety of clients around the world. Prior to joining Nedbank Private Wealth, David spent 15 years with RBC Wealth Management where he held several senior roles, latterly leading the investment business as managing director and head of discretionary investments in Jersey.
David is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.
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David McFadzean was joined by Andrew Yeadon to talk through the main Q1 2020 news driving markets, portfolio positions and what we expect may take place in Q2 2020 and beyond.
Read moreDuring our 19 March webinar, David McFadzean, our head of investments, discussed recent events linked to the coronavirus pandemic with Simon Watts, our senior investment analyst. Due to the number of questions asked during the webinar, we have put together this Q&A, grouping questions together where possible, and using the information available at the time.
Read more2019 marked the 25th anniversary of the opening of Nedbank Private Wealth’s Jersey office. Your memories of 1994, if any, are likely to depend on your interests or predilections at the time or since.
Read moreInvestment performance is sometimes reported before fees and charges are taken into account and sometimes after everything has been paid, i.e. net of fees.
Read moreWe publish our total expense ratio to flag to investors exactly what they pay when investing in our portfolios. However, we include costs that others don’t always include.
Read moreWe operate in a really competitive industry. It’s one of the reasons why some people find it difficult to choose an investment manager – there’s such a huge choice! We believe there are five key points you need to consider when making your selection.
Read moreUnlike tossing a coin, portfolio management is not a game of chance and the risks are not usually 50/50. There is a huge range of potential investments to choose from and a professional wealth manager should be able to demonstrate consistent results over a long period with a greater success rate than 50%.
Read moreDavid McFadzean was joined by Simon Watts on a webinar to talk through the latest news due to coronavirus, portfolio positions and what we might expect next.
Read moreIf you are interested in becoming a client, please complete the form via the ‘become a client’ button below. Alternatively, if you are already a client, or if you have a question about how we help clients in particular circumstances, please use the ‘contact us’ button.
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