Superior investment returns can not be achieved without taking risks! To identify the risk, which the investor sees to identify, is the key to successful asset management. Diversification between asset classes is a widely accepted way of reducing risk. A basic principle in investments is to measure the investor's financial need for the risk / return profile of the investment.

A few golden rules in investments:

• start as young as possible to invest money - risk tends to disappear over the long term.

• First pay all debt with an investment

• Take informed decisions - uncertainty is the biggest investment risk

• First determine which risks can not be taken - (the greater the chance of making big money, the greater the chance that you can lose your shirt) before deciding which ones can be taken.



Broadly speaking, an Investment Planning is a process of achieving an effective and tax-friendly investment solution according to your financial needs and the degree of risk you can handle. Investment planning aims to achieve two equally important goals, namely to maximize growth and to effectively reduce the risk. Effective investment planning aims to maintain a balance between the above in order to achieve the investor's goals. Each investor wants to achieve one or more of the following objectives:

1. Wealth / capital protection

2. Prosperity creation

3. To earn income These goals are not easy to reconcile, so a thorough investment planning will try to achieve the best balance. The investment planning process The investment planning process must take place within the framework of the six-step financial planning process. The steps are as follows:         

1. The establishment and determination of a relationship agreement with your Financial Advisor

i. Discuss the financial planning process.

ii. Manage your expectations.

iii. Determine each person's responsibility iv. To determine your level of financial knowledge and disposition towards investments. v. FICA legislation vi. FAIS legislation

2. Collection of investor information 

This step includes collecting the client's assets as well as liabilities. Without sufficient knowledge of the investor's total financial circumstances, it is impossible to make an acceptable proposal. Use this to obtain the following information:

i. Short-term investments (bank account balances and (savings accounts)

ii. Long-term investments (fixed deposits and securities)

iii. Equity investments iv. Other investments (rental income, property investments) v. Insurance, retirement annuity, pension and provident funds

vi. liabilities At this stage, the investor's specific needs must be determined.

The following facts must be determined:

i. The investor's liquidity requirements

ii. The investor's current tax position

iii. The investment time horizon

iv. The risk that the investor is willing to take to achieve his / her goals

3. Analysis of information 

The main purpose of this step is to determine the investor's current financial position including its cash flow.     

These steps must be taken to achieve the goals.

i. Identify shortcomings and sufficient adequacy in the investor's current situation

ii. Analyze assets and liabilities, budget, investments, current insurance coverage, tax situation and cash available from the investor.

4. Preparation and recommendations of solutions 

The financial planner has to offer financial planning and recommendations that relate to the investor's goals, based on information provided by the investor. The planner must work through the recommendations with the investor to ensure that the investor makes the right decision. The planner must listen to the investor's questions and answer it as completely as possible.

5. Implementation 

Once the strategies have been discussed and agreed, the adviser and investor must decide on the implementation. For example, if the money is invested overseas, the necessary control procedures must be followed.

6. Overview and monitoring 

The portfolio must be monitored on a regular basis. The investor must know how his / her funds are invested and the changes that have taken place. Why is capital growth important? Capital is used as a source of income and also as a disruption of assets. In order to preserve the purchasing power that generates capital or to preserve the capital itself, it is of utmost importance that growth is at least at the same rate as inflation. The financial planner needs to determine how the value of money will be affected over time. It is known as the "time value of money". 

Key factors affecting investors' investment strategies

1. Risk refers to the uncertainty that the investments will earn / achieve the expected growth / interest.

1.1 Risk yield It is a generally acceptable principle that increases risk with potentially higher returns. Lower risk is associated with lower returns. A common misunderstanding is that higher risk equals higher returns. Higher risk gives the POSSIBILITY higher yield. There are no guarantees. Risk means higher potential returns with higher losses.

Type of risks:

1. Market or Measurement (benchmark) Risk:

This refers to the risk inherent in a particular market. Market risk affects all investors in that particular market.

2. Market timing Risk:

This is the risk an investor takes to buy and sell shares based on future pricing forecasts. With Time Risk you can completely miss out on beneficial market movements because you predicted it incorrectly.

3. Exchange rate / Foreign exchange rates:

By doing so, good investment returns can be eliminated through exchange rate fluctuations.

4. Geographical Risk:

Risk associated with the risk of the country in which you invest - Politically unstable.

5. Sectors Risk:

Has the risk that all companies in the same sector's shares may fall simultaneously.

6. Fund Management Risk:

When fund managers do not act according to their mandate.

7. Liquidity risk:

Where a given asset can not be traded fast enough.

8. Investments / or term Horizon Risk:

Inherent risk reduces in growth instruments when the term is longer. A term of an investment affects an investor's risk. The longer the term / duration horizon, the lower the risk.       

9. Diversification:

Diversification refers to the distribution of a portfolio of many investment instruments to prevent overweight exposure in any one. The prices of shares, bonds, properties, valuable metals and other investments fall and do not rise in pairs or groups. Therefore, one asset class will be in decline and another in a rise. Consequently, by investing in two or more asset classes, there will be times when one is rising and the other is in a declining phase. These different asset classes perform differently under different circumstances. Diversification of an investment will therefore result in lower volatility. A well-diversified portfolio will therefore theoretically yield a higher return on a given risk profile.

Ways of Diversification

• Invest in different asset classes

• Invest in South African as well as in foreign assets

• Invest in different types of instruments in different asset classes

• Invest in balanced managed portfolios, rather than investing directly in individual shares. Risk assessment: The amount of risk that an investor is willing to handle differs from investor to investor as well as investment needs to investment needs.

Objective consideration

• The older the person is, the more risk-resistant due to the short term of the investment.

• The longer the term, the greater the risk tolerance

• The greater the available investment for income, the higher risk tolerance. Subjective considerations

• The investor's investment experiences

• The investor's response to market fluctuations

• If the investor does not have a short-term investment, it can pose a big risk liquidity One has to ensure that enough cash is available for essential expenses as well as planned future expenses. There is a relationship between the liquidity of an investment and its return. The general rule is that the longer the term (less liquid) the higher the yield. tax The investment with the highest return is not necessarily always the best investment. Tax implications will vary depending on the investment chosen by the investor, and the later payable tax on an investment plays an important role in choosing the most suitable investment. inflation Inflation is the daily price increase of goods and services and the consequent decline in purchasing power over a given period. Inflation is measured by determining a basket of goods and services used by the typical consumer, and then keeping track of the cost of such a basket. Rule 72 is used as a guideline to determine how long it will take to halve the purchasing power of money.                   


         Current inflation rate

Assume inflation over the period of 8% pa = 9 years for value of purchasing power of money to halve.

The need to maintain or even increase the value of purchasing power during inflationary times has become a very important factor in investment planning. Fixed deposit investments are subject to a slow loss of investment values. An investor who strives to preserve the purchasing power of his money (income) is obliged to place his money in investments where there is a possibility of capital growth and thus a greater degree of risk. Inflation as well as guarantees in investments are also risks that investors need to realize. The investor must realize that while he has a guarantee of his capital, he will receive a lower than inflation return on it. This once again emphasizes the importance of diversification of an investment. To increase the value of an investment in inflationary times has become a major factor in investment planning.                 

In closing:

It is very important that every investor understands what is being done, familiarize yourself with the risks you can take and trust your advisor!

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Aliwal North

Eastern Cape | South Africa

Gariep Financial Planners, an Authorised Financial Services Provider with FSP No. 15197

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