The Three Forces At Work When Investing

The Three Forces At Work When Investing

 

The Human Side Of Money presented by Client Care Lifestyle Financial Planning

There are 3 forces at work when investing. If you hear someone using the word “risk” in relation to investing, then there is a good chance that they do not really know what they are talking about, it is an easy go-to but what they are really talking about is likely volatility or price fluctuation.

The first and most dangerous force when investing is permanent loss of capital. This comes from owning a single share which blows up or having all your wealth in one place and then losing it, this is a biggie.

The next force is inflation or inflation risk. This is the slow erosion of your wealth over time, the loss of purchasing power. Remember cash is only a currency.

The third force is volatility which many people mistakenly call “risk”. If you hear the word “risk” in relation to investing or a portfolio replace it with the word “return”. So, when someone says “that is a high-risk portfolio” or “this is a low-risk portfolio” you should say, no, this is a high return portfolio or a low return portfolio. Yes, the high return portfolio may have more volatility than the low return portfolio, but you will be handsomely rewarded over time with a better return.

Even with a portfolio 100% invested in global equities (the great companies of the world), the only force against your money is volatility. Total and permanent loss of capital cannot happen because you are investing in many different companies around the world. This type of portfolio will also smash inflation, the second force and make sure that you protect the spending power of your money over time.

So, when investing try not to use the “risk” word which instils fear but rather speak about volatility and understand that this is a natural force when one invests over the long term.

 

Dirk Groeneveld, Certified Financial Planner

t. 083 261 9287

e. dirk@clientcare.co.za

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