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ASK CMMB COLUMNWhat are the risks involved in investing

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26.JAN.07

As investors we are always asked to focus on the benefits/return of investing but aren’t there risks involved in investing as well?

You are quite correct. One cannot speak about the return on an investment without considering the risks involved. Risk and return are two sides of the same coin. In fact, the higher the potential return on an investment the higher the risk involved.{{more}} Of course, the stock market has a higher degree of risk than a fixed deposit or a money market account. However, despite the many downturns in the market during the course of history, stocks have ALWAYS recovered. The market recovered after the Great Depression, the Asian Crisis, and 9-11 although the recovery took some time to eventually occur. Therefore, the key is to have the time to wait for the market to experience an upturn. Therefore, you would not want to put money into the market that you would need at short notice. If you have to liquidate a portfolio due to an emergency it may be when the market has fallen resulting in a loss on your investment. Over the long term therefore the probability of a high return increases significantly. In fact financial theorists have coined a new term referred to as “Time Diversification of Risk” which means in essence, that the risk of investing in the stock market decreases as the holding period of the investment increases, all things remaining constant. So examine your portfolio and decide based on your budget, what part of your savings you can lock up in the stock market for a few years. Then, talk to a few stockbrokers to get the best advice about building a portfolio of shares.

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