Investing in the capital market can prove to be a daunting task; however, it can also be immensely rewarding if executed efficiently. The key to successful investing does not just lie in knowledge of the market and financial instruments but is dependent on the management of risk.
Coronation Asset Management highlights that the return that an investor receives is dependent on the risks taken. Thus, a proficient strategy for successful investing would necessitate anticipating, understanding, and managing risks sensibly.
Investors often seek high returns while limiting the risk of losing their invested capital. However, investments always carry a certain level of risk, which drives investment returns.
Generally, investors receive returns according to their level of risk-taking. It is essential to balance risk with returns so that investors are not enticed by high returns and take unreasonable risks. An individual’s preparedness to take risks is known as their risk appetite.
Once investors determine their risk appetite, they should match their investments accordingly and create a suitable investment strategy. They can research various instruments going themselves to create their customised portfolios.
“Asset managers are able to help individual investors assemble a portfolio of investments that match their risk appetite. For active investors wanting to track the performance of their investments in real time, it makes sense to work with an asset manager able to regularly report on performance, advise and guide responses.”
It explained that “today, there are also online investment options supported by digital platforms allowing individual investors to buy, track and sell investment instruments and funds online. While the effectiveness of these platforms varies, most require some level of investment knowledge and experience. Despite the hype and all the advice and guidance they provide, these platforms are not for first time investors. Alternative investments, like cryptocurrencies, while appealing to younger generations, have limited performance track records, are harder to understand and research, and, currently, represent significantly high risk.
Where To Invest
Equities; Provide the portfolio a better return rate, they also introduce a moderately higher level of risk, presenting a portfolio that can be rated five on a scale of 10. A share of stock is a piece of ownership of a public or private company. The investor may be entitled to dividend distributions generated from the company’s net profit. The stock’s value can also grow and sell for capital gains.
Bonds (FGN, State and Corporate): They are long dated instruments (higher than one year) issued by either the federal government, state government or corporations. Because they are longer dated, they offer competitive rates than that applicable on short dated instruments.
Collective investment schemes: Collective investment schemes, usually delivered through group or mutual funds managed by investment professionals, become important. Most first-time investors simply do not have the time or research capability to actively construct and manage bespoke portfolios – or pay a bespoke wealth manager to do this for them. Instead, the best way to start on the investment journey is with mutual funds.
Mutual funds are investment instruments that allow investors to place money in investment structures representing a collection of companies whose profile and performance matches their own risk appetite.
Commercial papers: These are unsecured short term debt instruments issued by corporations. While we have preponderance of CPs in the market, doing the due diligence to investing in high rated instruments and issuers is also important.
Treasury bills: These are also short-term debt instrument issued by the federal government, with tenors varying between 92, 181 and 365 days. Combining a CP issued by a corporate with a high investment grade rating, with FGN issued treasury bills and fixed deposit placement presents a portfolio that can be rated two on a scale of 10, with returns reflecting the confidence provided by the high investment grade rating.
Overall, investment trajectories are also important when considering investments. While Coronation Asset Management advises investors to remain in their investments for a minimum of six months or a year depending on the composition of their portfolio, the longer the better remains an excellent investment philosophy.
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