Usually the more certain the return, the less risky the investment. For example,
investing in bonds offer a less volatile form of return. They have fixed-income characteristics
- regular interest repayment and full repayment of principal upon maturity. When
investing directly on the KLSE Second Board, the chances of making good returns are
equally as high as losing the bulk of your investments.
One factor which is likely to determine your tolerance of risk is the length of
time available prior to your retirement. Longer time horizons normally provide greater
security for an investor.
If you have greater time allowance, you are more able to minimise your investment
risk. Why is it so? The longer time frames simply allows you to effectively diversify
your risk through different market cycles.
A unit trust that invests heavily in the stock market tends to be volatile in
the short-term. Share prices fluctuate greatly in the short-term but are smoothed
over in a longer time frame.
In short, longer time frames allow you to take on a higher level of risk as the
risk can be diversified and thus reduced across different market environment. Thus,
if you are still young and single, you might want to invest in say, a unit trust
that concentrates more on equities rather than fixed-income securities such as bonds
and fixed deposits. On the other hand, you are more likely to be on the conservative
side if you have only a few years left in your retirement.
Your risk tolerance tends to change as time progresses. You are likely to change
your risk profile as you go through the different stages of life as summarised in
Table 1. The table illustrates a typical investment life cycle for investors.
As you get older, your need(s) might change as you might have already acquired
many assets such as a house and a car. On the other hand, a young person who has
less financial commitments is normally more willing to take on a higher degree of
risk.
Table 1
|
|
|
|
|
Factors/age groups
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Early (20s)
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Middle (30s)
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Late (50s)
|
|
Risk Tolerance
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High
|
Moderate
|
Low
|
|
Investment Time Period
|
Long
|
Long
|
Short
|
|
Types of Return
|
Growth
|
Growth + Income
|
Income
|
A thorough understanding of your risk profile will help you better plan your investment
portfolio. No two investors are alike. You should start an investment plan as early
as possible to take advantage of the benefits of time diversification. Given a longer
time period, your investment planning will become more effective.
