As you embark on your investing journey with StashAway, we’ll ask you to select a StashAway Risk Index (SRI) if you select the General Investing option. At that point, you may be wondering which SRI you should choose.
We’re here to help you understand what the SRI is, and what to consider so you choose the SRI level that’s best for you.
Risk, or how much of your money is at stake, is an inherent factor of any investment. To help you visualise how much risk you’d be taking with an investment with us, we qualify all of our portfolios by the SRI.
The SRI is derived from a common risk metric, Value-at-Risk (VaR). VaR measures the likelihood of a potential loss on your portfolio. Basically, it preemptively answers the question, “How much could I possibly lose on my investment in any given year?”
Specifically, the SRI uses 99%-VaR, which means that your portfolio has a 99% chance of not losing more than the given SRI percentage in any given year. For instance, if you choose to invest $50,000 SGD at a 14% SRI, there’s a 99% chance that you won’t lose more than $7,000 SGD in a given year ($50,000 SGD * 14% = $7,000 SGD). You can also say that there’s only a 1% chance that you’ll lose more than $7,000 SGD.
So, the higher the SRI level you select, the larger your portfolio’s potential downside risk. The range of SRI levels offer options for different risk appetites and various investment needs.At StashAway, General Investing Core portfolios range from SRI 6.5% to 22%, and our General Investing Higher-risk portfolios go up to SRI 36%.
Our system will recommend an optimal SRI level based on your financial assessment questions.
For instance, if, based on your financial knowledge assessment, our system classifies you as a relatively conservative investor, it will recommend a portfolio with a relatively lower SRI that may see a higher allocation towards less-risky, protective asset types, such as bonds. Alternatively, if our system classifies you as an investor with some financial background, it may recommend a portfolio with a higher SRI level that has more growth-oriented assets, such as equities.
Our recommendation only serves as a gauge of your risk appetite. You’re free to select an SRI level that is higher or lower than the recommendation. And you can always change it along the way, as we understand that your financial needs might change at different phases of your life. With that said, we definitely recommend that you aim to select an SRI that’s true to your personal preferences. By taking more risk than you’re comfortable with, the inevitable short-term market ups and downs may be more painful for you to handle. A key to setting up a successful investment plan is to set one up that you don’t play with, no matter how the markets or economy is doing.
Though we don’t ask specifically for your time horizon for General Investing portfolios, we do recommend that you select a lower SRI for investments with shorter time horizons (1-3 years), and if you’re feeling comfortable with it, select a higher SRI for longer-term time horizons. A longer time horizon gives you more time to recover from changing market and economic conditions.
There’s a common misconception that higher risk translates into higher returns. However, it’s not that straight-forward.
Over a long time horizon (3-5 years), riskier investments, on average, have higher returns than less-risky investments. This is because the market, over the long term, goes up. But, achieving these returns comes at the cost of exposing your investments to more volatility in the short term.
Higher SRI portfolios are more heavily weighted in growth-oriented assets than lower SRI portfolios are. This means that these riskier portfolios are more exposed to market movements.
For instance, a 36% SRI portfolio will be more largely affected by the markets’ ups and downs than a 6.5% SRI portfolio would be, ultimately resulting in experiencing more volatility compared to that lower SRI portfolio over the same timeframe.
If you’re able to stomach the short-term volatility without trying to get in or out of the market, then a higher SRI may be OK for your medium-to-long-term investments.
We’re sure that you don’t want to lose sleep over your investments, especially when the markets are volatile. Some people can stomach the volatility in the short term for the long-term gains, but many can’t, and that’s OK. What’s most important is that you choose an SRI based on how much risk you’re comfortable taking, not based on the potential returns.