April 4 2010: Evaluating market trends and close scrutiny of the operating environment is key to mitigation against investment risk during volatile market conditions, noted a risk expert recently.
Investment risk is uncertainty attached when you make an investment that may not yield the expected return.
Topiwa Chilume, the Legal and Compliance Manager at Botswana Insurance Fund Management (Bifm), has urged investors to look at their budgets, understand the economic environment and take a closer look at the market trends.
He was responding to questions on the role of risk under current market conditions.
“In light of current market conditions understanding the markets and the environment will pay better dividends. Investors should take into consideration, in determining their particular risk profile, the time frame of the particular investment and the amount of funds they want to commit to that particular investment or group of investments,” said Chilume.
“The investment risk pyramid offers investors a broad outline of investments they may consider to suit their particular risk profile. For instance, low risk such as government bonds and savings are relatively safe in that your initial capital is preserved but yield lower returns.”
Chilume, in addition, notes that depending on the amount of money being invested, diversification of investments across various asset classes assists in spreading the investment risk.
“The performance of the economy will always affect investors. By choosing various sectors to invest in you spread the risk thus guaranteeing higher returns. We need however to sensitise individual investors on other forms of investments so as to reduce reliance on traditional forms of investments such as livestock and savings accounts,” he added.
These remarks come against the backdrop of uncertainty, which had marred markets across the globe last year. Significant market volatility and a liquidity freeze left investors guessing. “To achieve higher returns in the long run investors have to accept short return volatility. How much volatility an investor accepts will depend on his s risk profile, which should be measured against his capacity to assume volatility based on his specific financial circumstances and his propensity to do so,” said Chilume.
He was quick to point out that looking for opportunities is not limited to times of harvest but even in periods of drought. He highlighted how some businesses and individual investors such as Warren Buffet had bought stocks relatively cheap because of the credit crunch. “When markets return to normal and stocks soar investors will make superior returns. That is how investment risk works. Know when to preserve capital, when to move fast, when to be cautious, and when to speculate. It is that understanding that separates the ordinary investor from the successful one and that defines sustainable returns in volatile markets,” he concluded.