Every purchase of stocks, bonds, mutual funds and other financial products entails some uncertainty about the final outcome.
To evaluate and compare different risk factors, banks, money management firms and financial consulting bodies engage in research based on data published by banks and investment bodies.
It is up to the individual investor to decide which risk profile suits them best.
Risk factors can be divided into corporate business viability, economic factors such as inflation and political factors such as unrest in the world. Inflation is a very significant factor because in the long run it diminishes your capital and your pension. Political unrest is very difficult to evaluate as it does not influence all financial markets equally.
Investors' needs vary. Some need steady income, others want to increase capital, and yet others just want to keep the value of their savings for the long run. Make a serious study of the risks you are willing to take, read the material available and talk to a financial advisor. Diversify investments. Even dollars under the mattress won't have the same buying power after many years. Don' t put all your eggs in one basket.
Most people who consult with me do not have the answers to questions about their financial position. They arrive with piles of documents accumulated over the years and do not have a clue as to how their policies and investments fit together.
What each investor must do is to define their need and then select the most appropriate asset allocation to achieve their goals.
Factors to consider:
l If you are trying to achieve growth, are you prepared to invest for the long term (seven to 10 years)?
l If you need income, have you looked at all the options (money market funds, preference shares, high dividend shares, property trusts, assurance company products - income plans and annuities)? Tax efficiency and inflation need to be evaluated.
l Have you evaluated the risk you are taking?
l Without changing what you have already, it may well fit into your current strategy. Not all your financial decisions can be considered incorrect.
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 these lower levels.
l Bryan Hirsch is a director of Pioneer Financial Planning. Visit www.pioneer.co.za