Proceed with caution: Balancing risk and return

WE have entered an investment environment comparable to a construction zone full of potential pot holes where lights are flashing: "Proceed with caution". While volatility and potential risks are heightened, overall return expectations are relatively low.

A predicament arises for investors as global monetary policy has effectively been designed to penalise savings and induce risk-taking. It is fortunate that the market's panic attacks over the past few years have been short-lived, providing us an opportunity to learn the lessons of the direct correlation between risk and expected return without having to pay the painful "tuition".

When weighing risk and return, the factors that change over time are the premium that investors receive for assuming additional risk and the variability of the outcome or the potential to suffer losses. Since 2009, largely due to experimentally aggressive easing measures from central banks, yields have declined to historically low levels and the premium for assuming risk has compressed.