with Raziah Ahmed
is a new wave of thinking in business literature: the so-called
soft edge. It is a philosophy, that creative thinking
is the essential competence that fuels sustainability. It
purports that the tried and tested ways, are a positive template,
but by themselves, may not hold court in the innovation revolution.
Systems that are fundamentally uncreative, and hard line,
are dying. This is equally applicable to our perspectives
on managing our money.
Last week, we looked at aspects of property risk, and how
risk can be transferred, or else self-managed. Today, we will
examine some of the concepts in the new wave of investment
thinking: stock market risk.
The risk that we will outlive our savings is greater now than
ever before, the risk of inflation, or devaluation (the US
dollar has lost another 10 per cent against the euro), is
The depletion of our natural reserves is a factor within the
context of an economic theory based in scarcity.
With the advent of the Unit Trust Corporation, the local community
began to dabble in mutual funds. Prior to that investment,
was limited to banks and insurance. Since then we have developed
a local stock market, and investment brokerage firms.
What determines whether you participate in these new investment
opportunities is something the brokers call risk tolerance.
This is your ability to shoulder the loss in speculative risk
taking. Recall that speculative risk is that category of risk
characterised by an opportunity to gain, coupled with an opportunity
to lose. There are questionnaires that help you determine
how risk averse you are ie how well you can tolerate
a loss if the market plays the wrong way. There are well-touted
stories of people shooting up Federal buildings in the US
because they lost thousands of dollars on the stock market.
After you have gauged your risk tolerance, the next phase
is to stabilise your investment portfolio. This you will do
via secure investments, such as bank and insurance investments.
These form the foundation of risk management. Without them,
your portfolio is without the two feet upon which every portfolio
Next, you can examine the playoff between return and risk.
The rule of thumb is that the greater the promises of gain
or return on investment, the greater the risk of loss. There
are four major vehicles to contemplate: mutual funds, bonds,
stocks or equity, and commodities, each with a successively
higher risk and promise of return.
Mutual funds carry the least risk, of the four, primarily
because they are managed by fund managers who
bring an independent perspective on the performance of the
companies involved. In this market, fund managers buy up a
variety of stock and/or bonds in organisations.
The companies are studied, in terms of past profits, and projections
for the future of the business. Intelligent guesswork, using
fancy equations, is involved in trying to predict a windfall.
The purchaser of a bond really lends money. The
contractual arrangement is that the bondholder lends
his/her money to the issuer of the bond, typically, in exchange
for a monthly/ quarterly income, and a return of the money
loaned, at the end of the life of the bondusually a
period of years. However, clauses in this type of contract
are very crucial.
Recently, on the local market, a bond was recalled.
This meant that the issuer of the bond had decided that it
would not be able to pay the income that was promised!
There are creative ways to solve financial problems, resulting
in win-win situations.
We shall continue our discussion next week.
n Raziah Ahmed is a Registered Financial Consultant.