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The best way to beat market risk

Nov 20 2016 06:54
Tandisizwe Mahlutshana

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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investment  |  market risk  |  personal finance
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