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RISK required to create long term wealth investment opportunities and proposals abound yet it should be borne in mind that inherent to every investment is an element of risk.
Every purchase of equities, property, government bonds and other financial products brings with it some uncertainty about the final outcome. Though one expects top financial companies to exercise due diligence it's still up to the investor to know his needs and align requirements accordingly.
Regardless of the recent rally in equities, the bear market (last year's fall) exposed the mistakes made by thousands of investors. Though many might have used financial advisers, what has happened is that the investors forgot the fundamental lesson, which is to diversify their portfolios.
One only needs to look at the figures published by the money market funds to see 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. The markets rose over 50percent from the low in March. Many of these investors are still sitting in cash, with interest rates down 5percent and the market at quite a high level.
Risk is not only about growth assets going up or down. Other factors play a role:
lCorporate business viability;
lEconomic factors such as inflation; and
lPolitical factors such as unrest in the world.
Inflation is your worst enemy because in the long run it diminishes the sum of your capital as well as the size of your pension.
Political unrest is a risk factor that is extremely difficult to evaluate as it does not influence all financial markets equally. As a result of this a drop in investors' confidence can lower stock markets, as we saw earlier in 2008 when enormous amounts of money were withdrawn by foreign investors, only for more to return in 2009 - hence the strong rand.
Each investor's needs vary significantly.
lDo you need an income?
lAre you looking for capital?
lAre you looking for income and growth?
In my experience, the majority of people who consult with me do not have nearly 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 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.
Factors which need to be taken into account:
lIf you are trying to achieve growth, are you prepared to invest for the long term (seven to 10 years)?
lIf you need income, have you looked at all the options available?
lHave you evaluated the risk you are taking? Even though you might be willing to take a risk, you need to have the stomach and the understanding that your values will go up but, there are times that they will be down. It's during these times that it is necessary to sit tight and not panic.
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.
l The writer is a director of Bryan Hirsch Colley & Associates. He can be contacted on phone 011-778-4633.