This week I would like to share a few ideas with you about a red herring in the Investment Industry called risk profiles. I call it a red herring because it, in its traditional form, is of no real value. Since the appearance of the Law on Financial Advisor and Intermediary Services on 1 October 2004 there have been continued references to the importance of a Risk Profile Questionnaire.
In these questionnaires emphasis is placed on questions which, inter alia, include the following:
1. The age and health of the client,
2. How knowledgeable the client is about investment markets and the experience he or she has in the investment environment,
3. How many dependants the client has and how the client views their own appetite for risk.
One of the few meaningful questions that are asked is for how long the client is prepared to invest their funds.
From the questions asked it is determined what percentage of the client’s investment should be invested in Cash, Government Bonds, Property, Shares, etc. Shares are viewed as high risk and Cash as low risk and the problem here is that history has taught us over and over again that the opposite is closer to reality, as shares are not necessarily high risk and cash not necessarily low risk investments.
I would like to present 10 simple rules which potential investors can follow:
1. Set clear goals with your Financial Planner – if you do not have a goal which drives your investment strategy, do not invest.
2. Get your finances in order – if you feel you are sinking between all of your outstanding accounts and liabilities, get these in order before you invest.
3. Question mandates – education in the subject of finances is important. There are many scandals in terms of illegal business practices.
4. Do not follow the sheep – when people purchase motor vehicles they look for the best value for money, when they invest they purchase at a price which has already increased. Analyse the situation yourself and discuss it with your Financial Advisor.
5. Be humble – to much self-confidence often leads to unnecessary transacting, unnecessary risk and ultimately a loss when the market drops.
6. Be patient – when markets drop there are always those that panic and sell. It is just a hump in the road, get over it.
Paarl African Group CC Registration Number 2002/092148/23 Director: HJ Janse van Vuuren E-mail info@paarlafricangroup.com Website www.paarlafricangroup.com
7. Show confidence – it is documented that the pain of a loss is felt twice as strongly as the pleasure of a gain. For some this results in an untimely withdrawal from the market.
8. Do not watch your investment continuously – you must trust your advisor as every time you amend your portfolio it could lead to unnecessary costs.
9. Do not ignore risk or put everything at risk – do not place all you have in a high risk portfolio, while at the same time you should also not place everything in cash investments. (You have a 100% chance of ensuring that you lose wealth if you place all your investments in cash.)
10. Do not make heroes of other people – look at what you are being offered and be critical in your decision making. It often happens that people suffer through following book or advertisement titles where the word riches is freely used.
The suggested route to follow is to enter into a written agreement with your Financial Planner wherein the time period of the investment, the liquidity of the investment and the communication and feedback to you is specified in the form of an investment mandate. You can get lucky and in a short time period receive a good return, but with a lot less risk you can expect a great return in the long term.
To illustrate the above: an individual that invested R 10 000 in a general share fund on 31 January 1978, and who has not touched or amended the investment in the interim, would have had an investment of R 33,5 Million on 31 January 2007, a return of 32,3% per annum and approximately what the all-share fund of the JSE returned over the corresponding period.