Every purchase of equities, property, government bonds and other financial products, brings with it some uncertainty about the final outcome. To evaluate and compare the different risk factors, banks, money management firms and financial consulting bodies conduct research based on published data. All this information is available and open to the public, but it is still up to the individual investor to decide on their needs and to align their requirements with those needs.
Although the equities market has rallied this year, the bear market last year exposed the mistakes made by thousands of investors. While they may have used financial advisors, many investors forgot the fundamental lesson – to diversify their portfolios. Figures published by the money market funds show how many people panicked, sold out of the equity market and moved into secure investments, fearful that they could lose more. How wrong they were as the markets rose over 50% from the low in March. Many of these investors are still holding cash, with interest rates down 5% and the market at quite a
high level.
The risk factors
Risk does not only encompass growth assets going up or down. There are other factors which play a role such as:
- Corporate business viability
- Economic factors, such as inflation
- Political factors, such as unrest in parts of the world
Inflation is an investor’s worst enemy as, in the long run, it erodes capital and the size of pensions.
The rule of 72 will help you calculate how the value of money drops.
For example, divide the rate of inflation into 72. If inflation is 8%, divide eight into 72 which equals nine.This means that in nine years, the purchasing power of R1 000 will only buy R500 worth of consumables or, you would need R2 000 to buy what you bought for R1 000 nine years ago. Political unrest is a risk factor which is extremely difficult to evaluate as it does not influence all financial markets equally. As a result of political unrest a drop in investors’ confidence can lower stock markets, as we saw earlier in 2008 when enormous amounts of money were withdrawn by foreign investors, only for more to return in 2009, which contributed to the strong rand.
Each investor’s needs vary significantly
- Do you need an income?
- Are you looking for capital?
- Are you looking for income and growth?
Do a comprehensive assessment of the risks you are willing to take, read the material available and talk to a financial advisor. Diversify your investments; even “rands under the mattress” will not have the same purchasing power in 10 years’ time. For peace of mind and to ensure that your investment strategy is balanced, do not put all your eggs in one basket. In my experience the majority of people who consult with me do not have enough answers to the questions I put to them regarding their financial position. Clients arrive with piles of documents which have been accumulated over the years and do not appear to have a real clue as to how all their policies and investments fit together.
What each investor must do is define their needs and then select the most appropriate asset allocation to achieve their goals.
questions which need to be taken into account
- If you are trying to achieve growth, are you prepared to invest for the long term (7-10 years)?
- If you need income, have you looked at all the options available (money market funds, preference shares, high dividend shares, property trusts, assurance company products – income plans and annuities)?
- Have you assessed tax efficiency and inflation?
- Each investor has a different attitude to risk. Have you evaluated the risk you are taking? Although you may be willing to take a risk, do you understand that there will be times when your investment declines. It’s during these times that it is necessary not to panic.
- It is possible that the investments you already have will fit into a changed strategy but you need to assess the “financial jigsaw puzzle” and see how each piece fits.
It is essential to have regular meetings with your financial advisor to assess whether your objectives are being met. Do not be overly concerned by short-term setbacks. If your investment strategy is sound, these setbacks could give you greater opportunity to invest at lower levels.
