Understanding your investments and the risks you may face when investing can go a long way in helping you successfully navigate difficult times.
So, you are looking to invest your hard-earned money. It can be scary in the current economic environment, with rumors of a global recession and uncertainty surrounding interest rate hikes.
But according to Lydia Fourie, investment writer at Allan Gray, now is not the time to abandon your investment plans out of fear.
According to Fourie, the evidence suggests that investing is one of the best ways to build wealth over time, and that keeping cash is often riskier. because you may not be able to grow your wealth faster than inflation.
“Given the lack of return, storing money ‘under the mattress’ or in a regular bank account is unlikely to give you enough protection against rising inflation. History has shown that you need exposure to risky assets, such as stocks, to beat inflation significantly over the long term. This is because these assets have historically appreciated in value significantly more than the rate of inflation when measured over long-term investment horizons.”
Understanding your investments and the risks you may face when investing can go a long way in helping you successfully navigate difficult times, Fourie says.
Familiarize yourself with the different types of risk
Research suggests that the pain of losing is stronger than the joy of winning, Fourie says. In other words, losing R1,000 hurts much more than the joy you would experience from winning R1,000. For this reason, understanding how your investment is likely to perform is crucial.
“One of the biggest risks is behaviorally based. That’s why it’s important to understand why you’re investing and make sure your choices are well-considered and aligned with your needs and goals,” Fourie says.
“If an investment performs differently than you expected, you may be tempted to trade it or withdraw, locking in losses. These knee-jerk reactions can derail your plans,” Fourie said.
Fourie explains that another major risk is the danger of overpaying for an investment. “We are very concerned about this risk when we actively invest our clients’ money, so we buy stocks that we believe are undervalued and sell them when we believe they have reached their true value.”
What else can you do to put aside the fear of losing money?
In addition to understanding the different investment risks, the next step is to not let momentum get in the way.
“Often, the thought of making the wrong decisions with our hard-earned money triggers a state of analysis paralysis. Our emotions get in the way and can lead us into costly mistakes or overwhelm us to the point of inaction. Overcome inertia and emotions, such as fear, is important for investment decision making,” says Fourie.
She says it’s also important to make sure your investment matches your risk profile and that your investment manager’s philosophy resonates with you.
“While we encourage a long-term approach to investing, we realize that the investing experience doesn’t just happen in 5- or 10-year intervals – you have to live through the short-term ups and downs and be disciplined enough not to jump ship on the wrong time This is easier said than done, but keeping the long-term picture in mind can lead to better long-term results and help you stay invested through any short-term fluctuations.
“Lastly, consider consulting an independent financial advisor, who can help you determine your risk profile and take a holistic view of your finances to recommend the best solution for your specific needs,” Fourie says.
Questions may be edited for brevity and clarity.
