Saving is good but investment is great, is a ready-made line for most personal finance experts. And they are right; investment guarantees extra income and creates bigger opportunities for achieving your dreams. But just how much risk are you exposed to and how much are you willing to take?
Let’s make it clear, whether you have your money stashed in a fixed deposit account or it is just a sitting-dock in a savings account, you are exposing yourself to some financial risk. Risk is everywhere and in everything. However, most financial experts agree that nowhere is cash more controversial than in investment.
When you have made more money than you expect to need in the near future, investing becomes the most viable option. Your money may be safer cooling off in the bank but it will not yield the desired dividends especially if you are thinking of making it big in the foreseeable future. Investment pays you far more interest than your savings will.
Investment is largely speculative. You are almost uncertain of what the future holds but you invest based on the possibilities inherent in that future. According to Charles Schwab, “There is no right or wrong answer to how much cash an investor should hold as an investment, it is a strategic decision.”
Your risk exposure is one of the key things that should be at the back of your decision to invest. Risk is a possibility that you may lose very important; this time something financial. It is the willingness to take certain levels of discomfort and uncertainty which may lead to a desired end.
Lower risk investment may involve investing your funds in savings bonds, T-bills, and money-market funds which only offer modest returns. Investment in a family business or friend’s start-up where you are sure of monitoring your investment may reduce the level of risk you will bear.
However most investors are not contented with little investments, they have appetite to accommodate higher risk exposures. All in all, investment is about strategy.
How do you reduce your risk exposure?
Decide your timeline. How long are you in a particular investment? You have to determine whether you are investing for three, four or five years or even longer. Your plan for five years can change depending on certain factors. Timing is important because of the uniqueness of the various investments. A stock for instance, may drop all of a sudden or go sky-high. Hence, someone who plans to stay for a short time in the stock market should just stay away. Anyone hoping to make meaningful profits in the market should have a long term view – from ten to thirty years. Consider the Nigerian stock market and the ups and downs that have followed it, anyone hoping to make good returns will be thinking in the long term.
Do not just consider one investment. Look at a mix of investment opportunities in different industries and sectors. Also bear in mind that variables or conditions that may cause one asset category to do well can make another do average or poorly. Investing in more than one asset category can reduce the risk of losing so much if one of the assets were to perform below expectations. If you are aiming to save for retirement, include some stock or stock mutual funds or bonds in your list.
Have an expectation of returns on your investment. How much do you want to make from the money you are putting in? In setting your expectation, set realistic targets. The returns you should expect will be determined by the type of risk investment. Returns on a low risk investment will vary from a medium risk investment and a high risk investment. Carefully evaluate every investment you make both pros and cons and seek expert opinions for clearer directions before making a bid decision.
Finally ask yourself, “How much risk is too much risk for me”? Every investment you make has risks; you can lose money on your bonds investment. Recently the Nigerian government reported a loss on her bonds. Shares can crash, banks can fail, and a business can make losses in a financial year or even go bankrupt. Sometimes, you can lose your principal – the amount you invested. There are really no “safe” environments in investment. Never invest money that you can’t afford to lose. In every investment decision, always consider what the worst case scenario could be and do not put all your money in one investment. Ensure that you diversify your investments.
Frank Eleanya
