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Keeping it simple

by Dave Thrifty

I have met people with substantial financial assets who are really ignorant of what their investment portfolios contain and what risk their investments entail. There is really no excuse for this unless you have too much money and can’t be bothered to spend time understanding the risks and potential return of your holdings.

Investing is really simple.

Every investment falls into one of three categories; secure, balanced or speculative. So the next time you are presented with an investment opportunity ask yourself into which of these categories does it fall?

If you get an email from Nigeria promising you millions of dollars in return for your bank account details you know this is a high risk no-go investment.

An equity fund in India which has averaged 40% each year over the past few years is also a speculative fund but has potential do the same again.

A balanced investment is less likely to fluctuate wildly up and down. A good example is that of Corporate Bonds. These are debt instruments issued by blue chip companies which pay a return higher than bank interest rates. The higher the return above bank base rates the higher the risk.

A secure investment is generally regarded as a no risk one. Bank accounts, especially when guaranteed by the Government and all types of deposit investments fall into this category. Property which you have owned for a long time in a first world country, may also fall in here.

The key to contented investing is to match your individual risk profile with what is available. If you ask most people what they expect from their investments the chances are they will tell you they want very high returns with little or no risk. If I tell them at outset that this is an impossible dream they are less likely to be disappointed when their speculative investment falls, or their conservative one underperforms. For every 1 or 2 percent gain above deposit rates there is a corresponding rise in risk.

And most important of all and the first question any sensible investor should ask is what sort of consumer protection do I get. If you hold the safest asset in the world ant the company holding it goes bankrupt where do I stand?

Please take professional advice and sleep well. It’s that simple.