There is a reason why equities grow as the economy grows over the long term and why they can inherently correlate with our future spending requirements, everyone can win if they are patient and realistic.
Trading is for the most part a nil-sum game hardly any different to gambling. Most people who bought in were trading options rather than the stock.
I don’t know at the end of the day whether the hedge fund managers and their investors will win or lose or whether the individuals who traded on RobinHood will win or lose.
The romance and the reporting of it will no doubt seduce more people to try this again. Most will lose, then feel those losses far more than the excitement and the gains.
We have a responsibility to ensure that our industry is as accessible as it is relevant and engaging.
We need to extol the value of advice and the vast majority of client success stories rather than obsessing over the tiny number of scandals or mistakes.
We must always consider risk when discussing return. When we talk about the headline equity indices or star manager performance, it can seem the risk is no worse, and the best returns are lower than trading, Bitcoin and gambling.
But most investors are recommended diversified solutions with significantly less risk and more sustainable and predictable returns.
FTAdviser: How can advisers explain 'good' and 'bad' risk to their clients?
LW: The concept of good and bad risk is an interesting perspective. Ultimately there are two ways that you can measure this.
Firstly, does the client have the tolerance, capacity, knowledge experience or need to take the risk? Secondly, does the potential return [of the investment] fairly compensate you for the risk you are taking?
What may by all reasonable measures be a good investment, with risk fairly compensated by potential return - so a good risk in itself - can be a bad risk for the individual because of who they are.
The problem is we tend to begin with the potential return and then follow with the risk, which diminishes the first part of the risk/return trade off and anchors the client to a high expected return.
This makes it difficult for them to accept the realistic return that comes with the risk that they are willing and able to take.
We need to stop focusing on returns like they are a game or the Holy Grail, and spend more time understanding the client in order to begin with the risk that is right for them.
