 My Risk Profile in Investing How much risk can I take in an investment? Before
undertaking any investment, do I consider the risk that could arise? How risky is my current profile? - Risk in investment to refers to the variability of actual
returns from those expected from a given asset. It is the chance of an unexpected financial loss or gain.
- Risk profile is an outline of those risks to which a firm is exposed. Risks can be divided into two:
- Financial Risks: This is the likelihood that a business will be unable to meet its short term maturity obligations
caused by use of borrowed funds.
- Business
risks: Generally, investments
that have high risks also tend to have greater returns. For instance, shares are high risk, in the short-term, however, in
the long-term, they promise greater returns.Granted
that our risk tolerance levels are quite different, each one of us needs to understand to what extent they can tolerate risk.
To determine our risk profile, we need to
consider a number of variables.
Below is a list of them.· - Our financial goals: We certainly would like to accumulate a given amount of money over a given period of time.
When it comes to investment, our decisions should reflect our wealth creation goals.·
- Financial risk tolerance: Most people cannot tolerate risk perhaps owing to their nasty past experiences.
They would rather take a calculated risk as opposed to an uncalculated one. ·
- Time horizon: If you have some money and you intend to invest ask yourself, how long am I ready to have
my money tied in an investment? Is it six months? One year? Two or more? If you need your money in six months or a year, investing
in less risky investments is advisable. However, if you need your money after 20 years, investment in risky areas such as
stocks is advisable.·
- Risk
of inflation. Inflation
is the general rise in prices of goods and services. Inflation eats on investments. For an investment to be said to be valuable
to you, the rate of return should be higher than the inflation rate. Usually, the lower the risk of investment implies the returns will be lower. Putting money in a bank’s
saving account might be less risky because
there is no risk of default because it is insured, yet there is a risk that inflation rates might be higher than the interest
on your account. If the account, for instance, earns four per cent interest, the inflation rate should be lower than this
per year for you to earn returns. So when
you are saving and investing, be guided by the rule: ‘the higher the risk, the greater the returns and vice versa.’ ·
- For instance, when you put your money in a bank’s savings account,
you should expect less returns because of the less risk involved.
- When you invest in stocks and bonds, your risk is considerably higher; you could either gain or lose
but the gain could be much higher.
Experts have lately tried to find a way of minimising
risk in investment while minimising returns. The Modern Portfolio theory is such attempt. Simply put, the core teaching from
it is diversification. If you want to invest under lower risk, yet get high returns, you should select a collection of investment
assets that have collectively lower risk.
 budgeting in a dairy farm
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The
viability of an Investment
Investors
now have a tool to gauge the probability that a business will collapse, especially in the start-up phases. This follows the
launch of a new business evaluation tool that allows investors in public and private sectors to understand the survival rates
of individual businesses better. The tool further helps them identify and weed out weaknesses that hold a business back from
growing after the take off stage. The new tool, known as Tristart, has been developed by UK-based Cambridge University, as a way of addressing
the maladies that have afflicted businesses over the years. This will help businesses calculate their chances of survival,
identify their strengths and improve the areas of weaknesses. The tool is designed to help banks and venture capital companies understand the viability of a business that
they are advancing credit to. It will help the numerous start ups that are borrowing money through the recently established youth and women development funds." Tristart is expected to address
issues that have over the years led to the collapse of a number of companies that range from poor management skills to a harsh
and costly operating environment. And although
a number of blue chip corporations have collapsed, the mortality rates among the small and medium enterprises is much higher.
According to the International Finance Corporation
(IFC), which has been involved in financing SMEs in Kenya, entrepreneurs are impeded by lack of affordable credit and technical
assistance. This has resulted in endemic
under-capitalisation and slow growth for many SMEs, and is a primary reason for the collapse of many such businesses. In almost
every part of the world, limited access to finance is considered a key constraint to private sector development and growth. Tristart came from research by Cambridge University researchers, who uncovered 19 factors that contribute towards a successful startup business.
They grouped these 19 factors into three key areas. - The factors are knowledge and experience of the individual running the company,
- the existence of an entrepreneurial spirit
- the market conditions and adoption of technology "An evaluation based on these factors delivers a clear understanding
of a firms weaknesses, something that can significantly reduce the risk of failure among companies in different growth stages."
Making informed investment choices
Financial success is a sought after
goal by many people. This is because financial success enriches a person’s life in a profound way. Besides enlarging
the scope of one’s happiness and influence, it also makes a person afford life’s niceties. A financially successful
person does not worry over small financial matters too. The
desire for attaining financial success has existed all through the history of man’s civilisation as attested by the
ancient existence of commerce. However, a great question that has plagued mankind for centuries is: which is the best way
to attain financial success? It is a simple question but clearly lacks a definite answer. Perhaps the more we look at what people do today to get money; the more we
get closer to the answer. Many people trade their time for money by being employed. In this way, they manage to meet their needs,
but most often they fail to rise beyond that point and become financially free. Some employed people receive their salaries,
pay bills and debts and are left penniless
to wait for the next month for the same ritual. They have neither emergency money nor savings that could come in handy in
case of a job loss.However, it is great to
note that a few of the employed really try hard to move out of the drudgery of working for money. By investing in mutual funds, and stock market, they take the first steps toward
making their money work for them where some have registered amazing success. Unfortunately, not all succeed to make their money work for them mainly because of lack
of proper investment advice.
As
a rule, whenever you are investing, be sure
to invest in an area you thoroughly understand. If
you intend to invest in shares, for instance, take time to study on how people make money in the stock market so as to approach the investment from an informed position.
And so it must happen to other forms of businesses. You want to start a business? First learn the ropes of that trade and
grow gradually with your business. The other
option is to conduct some research on that form of business with a bid to obtaining facts about its viability. Knowing the
possible challenges will enable you prepare how to face them in advance. Prior information will enable you have realistic
expectations of what you can earn through your investment. A few others leverage their power and influence and as a consequence get opportunities to make money as happens
to politicians and government bureaucrats.Yet
apart from those known ways of making money, there are some other principles which, though simple they may appear to most
of us. - One of these obvious principles is that the foundation
of success in life is good health. Good health is the substratum of fortune and the basis of happiness. No person can accumulate
money while sickly. You need a sound health.
- Secondly,
to make money you have to take a career or vocation that is in line with your natural inclinations. Unless one takes up a
vocation that suits their peculiar talents, one is unlikely to succeed.
- The third principle is that in life there is nothing like fortune. Fortune comes to those who have, by effort,
created the right conditions for fortune. As a rule, work hard always. With boldness, do your part without waiting for lady
luck out there knowing well that fortune favours the brave and does not help a person who does not help themselves.
- Fourth, never compromise your integrity. Strict honesty is the foundation
of success in any field of life including financial life. When you are honest, many people will trust you. If you have a business,
your honesty will make many customers to come. If you are a lawyer reputed for honesty, it naturally follows that many more
clients will come to you hence you could make more money. From an ordinary eye, an honest person might appear poor, yet in
real sense they have at their disposal a key to open all the purses of the people around. They can borrow from anybody and
be given for they are known not to default. In short, honesty opens all the avenues of success.
- Fifth, always be patient to learn by experience. If possible, never fear to
start from the bottom. Greatness is a sum of accumulated wisdom.
Are you in business? - Learn the much you can in your field and be an expert in it.
- Study the rules of money creation, and human nature. This is the principal, the greatest seed money which with time will increase itself by interest.
- History provides illuminating examples which inform our belief that most
of the rich started off as poor but with determination, economy, patience, industry, and good habits, they saved and invested
over and over until they became wealthy
- Finally, save and invest
as much as you can. A shilling saved is a shilling earned; conversely, money invested is money working for you.
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