On the Money with Pieter Willem Moolman: The Principles of Investing
www.MyPE.co.za: When
consulting with a client who wishes to invest, it often happens that
our mandate is to achieve the maximum return on their funds, but with
the minimum risk to their capital.
This may sound like a simple instruction, but first the client has to
understand what it is that they are saying.
The field of
investment options are vast and how do we narrow these down to
recommend a suitable investment option for a client?
Each client comes with a specific set of circumstances relating to age,
employment, funds available, time horizon for the investment and many
more.
So, for example, a 65-year-old who is retiring from his pension fund
will be a very different investor to one of 45 who has some funds
available that he wishes to invest in the stock market.
These two examples indicate some of the crucial aspects that have to be
considered. The term the investor wishes to invest for, for example,
has to be determined and when does he require the capital to be
returned, if at all?
The person who is retiring may be more interested in the income
generating capability of his capital (which is one of the many
functions of investment returns) while he understands that his capital
may not necessarily be returned. I know that there are variations on
this theme, when one considers living annuities, but that I will
discuss in further articles.
An investor investing “extra” funds in shares would also want the best
return on his capital, but may understand that there is a greater
possibility of fluctuation in the value of his capital. It is however
important to mention that not necessarily all investments in share
portfolios should be classified as risky.
It is important that the investor has at least a basic understanding of
the various investment asset classes, the possible risk attached to
each and how they interact with each other.
For instance, cash is seen by many investors as a low risk, stable
investment asset class. However, the risk attached to cash,
is that inflation will deplete the real buying power of your money.
The other main asset classes, shares or equities, bonds and property
each have their inherent risks and benefits. Therefore, many investors
are suited to a mixed portfolio containing differing combinations of
the various asset types.
As a rule of thumb, investors have to remember that high returns are
often accompanied by high levels of risk. This is why determining an
investor’s risk profile may be a handy exercise to see whether they do
in fact have such a big appetite for risk.
Risk profiling is however not an exact science. It is merely an
indication of the investor’s views on the various aspects of investment
at that particular time.
One often finds that anyone who has been disappointed by returns
quickly becomes a far more conservative investor!
Next time, more about different investment vehicles and the benefits
provided by each.
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Pieter Willem Moolman is the founder of PWM Financial Management in Port
Elizabeth in the Eastern Cape. Their mission is to provide financial
security and create wealth for their clients.
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