The best way to beat mar­ket RISK

A small debit or­der will serve you in the long run, writes Tan­di­s­izwe Mahlut­shana

CityPress - - Business -

One way to man­age risk is to spread it. While your in­vest­ment man­agers will man­age your risk ac­cord­ing to the pa­ram­e­ters set out in your fi­nan­cial/in­vest­ment plan, there is also a way to spread you risk, and there­fore man­age it, while grow­ing your cap­i­tal over time.

Over and above your lump sum in­vest­ments, con­sider in­clud­ing a debit or­der or re­cur­ring in­vest­ment as part of your in­vest­ing tool­kit. By in­vest­ing fixed amounts at reg­u­lar in­ter­vals over a long pe­riod, you are spread­ing risk over time.

Reg­u­lar re­cur­ring in­vest­ments re­duce the temp­ta­tion to time the mar­ket and you re­ceive the ben­e­fits of cost av­er­ag­ing, which re­duces your over­all unit prices.

When the mar­ket has risen and units are more ex­pen­sive, your monthly in­vest­ment amount will buy less. Sim­i­larly, when the mar­ket has fallen and units are less ex­pen­sive, you will re­ceive more units for the same rand amount. You there­fore get an av­er­age cost per unit over time.

This means that you min­imise the risk of in­vest­ing sub­stan­tial amounts at in­op­por­tune times and when units are ex­pen­sive.

The ben­e­fits of rand-cost av­er­ag­ing can be at­tained by sim­ply im­ple­ment­ing a reg­u­lar debit or­der. Once set up, a debit or­der is au­to­matic. Ini­tially, small debit or­der con­tri­bu­tions may not seem sig­nif­i­cant, but they en­able in­vestors to fos­ter a good sav­ings habit. Over time, th­ese con­tri­bu­tions ac­cu­mu­late and grow, thanks to the power of com­pound in­ter­est.

A R200 in­vest­ment (which you’d hardly no­tice com­ing off your ac­count) each month for 10 years with a re­turn of 6% a year through­out the term would grow to more than R32 000.

Com­pound­ing oc­curs when in­vest­ment re­turns are added to your orig­i­nal in­vest­ment and th­ese re­turns then start earn­ing re­turns as well.

Ef­fec­tively, this al­lows you to gen­er­ate re­turns on ad­di­tional amounts that haven’t come out of your pocket. As your in­vest­ment grows – from fur­ther con­tri­bu­tions and in­vest­ment re­turns – you will earn re­turns on an in­creas­ingly larger in­vest­ment.

Debit or­der in­vest­ing also deals with the temp­ta­tion to spend what you should be sav­ing, mak­ing you a dis­ci­plined in­vestor.

While you’ll be sav­ing with dis­ci­pline, a unit trust-based prod­uct gives you the flex­i­bil­ity to ad­just your debit or­der pre­mium if your per­sonal cir­cum­stances change. Should you be faced with un­ex­pected monthly ex­penses, you will be able to lower your debit or­der pre­mium to a prod­uct-spe­cific min­i­mum amount.

Con­versely, should you find that you have more avail­able to save, you can eas­ily in­crease your monthly pre­mium and in this way give your in­vest­ment a boost.

For in­vestors with debit or­der in­vest­ments al­ready in place, in­creas­ing the monthly con­tri­bu­tions could have a sig­nif­i­cant ef­fect on the ul­ti­mate out­come of the in­vest­ment. Mahlut­shana is the ex­ec­u­tive of mar­ket­ing at PPS In­vest­ments

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