How risky are popular shares?

January 29th, 2014 by

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Dan Woodruff

Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.
How risky are popular shares?

How risky are popular shares?

Do you hold shares in well-known companies? These companies are usually seen as pretty safe given that they are used by everyone. But how true is this? We use interesting data to examine this view, and expose the potential risks of some popular shares.

Key points

  • Some popular shares can be riskier than you think
  • How to measure risk in shares
  • We compare banks, supermarkets and media companies
  • How to manage risks with your investments
  • Should you sell your popular shares?
  • Get your free investment checklist

Why is this an issue?

We often meet new clients who hold some popular shares of household name companies. These shares could be a legacy of some free issues when a company was demutualised. Many of these shares were bought when public companies were sold by the State into private hands (think BT). Since the shares were often free, or were issued via some major Government campaign, it can be tempting to think of them as relatively safe. The reality can be quite different. Most people tend to think that large companies equal safe companies. This is not always true. Remember Woolworths? We often find that people are resistant to selling their popular shares. On its own this is not a problem at all. However, we often find that the same people who want to hold on to their popular shares are also quite averse to taking risks. This got us to thinking about just how risky popular shares can be.

How to measure risk in shares

There are many ways to measure risk. For the purposes of this article we are going to use the Financial Express risk score. This is the data provider we use with our clients. This score is a neat way of quantifying the risks taken with any investment.

How does this risk score work?

The Financial Express risk score expresses risk as a measure of volatility versus an index. In our case, this is the FTSE 100 index of leading UK companies. This is convenient since most of the companies in this analysis sit in this index. Volatility measures the degree of fluctuation in an investment. The greater the volatility, the more the fluctuation, and the greater the risk. The data measures risk over a 3-year rolling period, so it tends to smooth out short-term blips.

  • The UK stock market is measured as 100 in the data
  • Any investment with a score of less than 100 is deemed to be less risky
  • Any investment with a score of greater than 100 is deemed to be more risky
  • The scores are relative – thus if an investment has a score of 50, it could be said that it is half as risky as the UK stock market.

Banks

We have produced a chart to show the relative risk of 4 major UK banks over the last 3 years.

Chart showing the relative risks of popular bank shares using the Financial Express risk score.

Chart showing the relative risks of popular bank shares using the Financial Express risk score.

  • The UK stock market scores 100 in the data. 
  • A sample bank account score 2. Therefore it could be argued that the UK stock market is 50 times riskier than a bank account.
  • HSBC scores 153 – it is over 50% riskier than the UK stock market
  • Lloyds bank scores 253 – it is over 2.5x riskier than the UK stock market
  • Barclays scores 281 – it is almost 3x as risky as the UK stock market
  • RBS scores 301 – it is 3x riskier than the UK stock market

Interestingly, HSBC is seen as much more stable than the other 3 banks in terms of risk. This is probably due to the fact that this bank did not need to accept additional capital during the credit crisis. Do these figures surprise you? Would you have thought that Barclays Bank is almost 3 times as risky as the UK stock market? Tweet this.

Supermarkets

Here is the data for 3 major UK supermarkets.

Chart showing the relative risks of popular supermarket shares using the Financial Express risk score.

Chart showing the relative risks of popular supermarket shares using the Financial Express risk score.

  • The UK stock market scores 100 in the data.
  • A sample bank account score 2. Therefore it could be argued that the UK stock market is 50 times riskier than a bank account.
  • Morrisons scores 152 – it is 52% riskier than the UK stock market
  • Tesco scores 156 –  it is 56% riskier than the UK stock market
  • Sainsbury’s scores 158 – it is 58% riskier than the UK stock market

The figures for supermarkets are remarkably similar, although they do show some differences at various points. Despite this, would you have believed that your supermarket is seen as 50% riskier than the UK stock market? Tweet this.

Media and technology companies

Here is the data for 4 major UK media and technology companies.

Chart showing the relative risks of popular media and technology shares using the Financial Express risk score.

Chart showing the relative risks of popular media and technology shares using the Financial Express risk score.

  • The UK stock market scores 100 in the data.
  • A sample bank account score 2. Therefore it could be argued that the UK stock market is 50 times riskier than a bank account.
  • Vodafone scores 149 – it is almost 1.5x as risky as the UK stock market
  • Sky scores 158 – it is 58% riskier than the UK stock market
  • BT scores 159 – it is 59% riskier than the UK stock market
  • ITV scores 199 – it is almost twice as risky as the UK stock market

Obviously, these companies operate in slightly different markets, which could account for why they have different risk scores. Despite this, would you imagine that BT would be seen as so much riskier than the UK stock market? Tweet this.

How to manage risks with your investments

What the data for these individual shares shows is the danger of holding all your eggs in one basket. Prudent investors diversify their assets, and that is exactly what we try to do when we manage our clients’ investments. We diversify assets by investing in a number of different companies and locations. This can be

  • Types of assets
    Our clients invest in shares, Government and corporate debt, property and cash. This may be broken down into different sub-classes.
  • Geographical location
    We would spread your money across various locations such as the UK, Europe, North America, Japan, Asia, and emerging markets.
  • Multiple investments
    We diversify by holding multiple investments within each type. For example, rather than holding one company share, we would hold between 50 and 200 shares. This spreads the risk should one of those companies fail.
  • Alternative assets
    We also invest in alternative asset classes such as commodities, to balance risk.

How does this work in practice?

Using the above strategies we are able to manage the risks of the investments our clients take. This chart demonstrates this in practice.

Chart showing the relative risks of 3 investment portfolios using the Financial Express risk score.

Chart showing the relative risks of 3 investment portfolios using the Financial Express risk score.

  • The UK stock market scores 100 in the data.
  • A sample bank account score 2. Therefore it could be argued that the UK stock market is 50 times riskier than a bank account.
  • Our Cautious risk portfolio scores 36. Therefore it takes roughly a third of the risk of the UK stock market.
  • Our Moderate risk portfolio scores 58. Therefore it takes roughly three-fifths of the risk of the UK stock market.
  • Our Adventurous risk portfolio scores 81. Therefore it takes roughly four-fifths of the risk of the UK stock market.

Even sophisticated and adventurous investors manage the risks they take with their money.

Should you sell your popular shares?

You shouldn’t necessarily sell your popular shares. This article was not written to scare you into submission. Instead, you should hold your shares as part of a balanced portfolio designed to achieve your long-term goals. If you hold popular shares with full knowledge of the risks, then this is appropriate. If you are averse to taking risks, then perhaps you should take some advice.

What to do next

We’d love to know what you think of this data – why not leave a comment below. Does this data surprise you?

If you want to review your investments, check out our Investment Management service. We have also listed a number of related articles below.


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