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So you are looking to invest your hard-earned money. It may be scary in the current economic environment, with whispers of a global recession and the uncertainty around interest rate hikes.
But according to Lydia Fourie, investment writer at Allan Gray, now is not the time to abandon your investment plans due to fear.
According to Fourie, evidence suggests that investing is one of the best ways to build wealth over time, and that keeping money in cash is often riskier because you may not be able to grow your wealth faster than inflation.
Understanding your investments and the risks you may face when investing can go a long way towards helping you successfully navigate trying times, says Fourie.
Getting to grips with different types of risk
Research suggests that the pain of losing is stronger than the joy of winning, Fourie notes. In other words, losing R1 000 hurts much more powerfully than the joy you'd experience gaining R1 000. For this reason, understanding how your investment is likely to behave is crucial.
"One of the biggest risks is behavioural-based. This is why it is important to understand why you are investing and to ensure that your choices are well considered and aligned with your needs and objectives," says Fourie.
"If an investment performs differently from what you expected, you may be tempted to change it or withdraw, locking in losses. These knee-jerk reactions may derail your plans," said Fourie.
Fourie explains that another important risk is the danger of overpaying for an investment. "We are very concerned about this risk when actively investing our clients' money, which is why we buy shares we think are undervalued and sell them when we think they have reached their true worth."
What else can you do to let go of the fear of losing money?
Besides understanding the different investment risks, the next step is not to let inertia get in the way.
"Often, the thought of making the wrong decisions with our hard-earned money triggers a state of analysis paralysis. Our emotions get in the way and can lead to expensive mistakes or overwhelm us to the point of inaction. Overcoming inertia and emotions, like fear, is important to investment decision-making," says Fourie.
She says it's also important to make sure that your investment matches your risk profile and that your investment manager's philosophy resonates with you.
"While we encourage a long-term approach to investing, we realise that the experience of investing doesn't only happen at five- or 10-year intervals – you have to live through the short-term ups and downs and be disciplined enough not to jump ship at the wrong time. This is easier said than done, but keeping the longer-term picture in mind can lead to better long-term outcomes and help you remain invested through any short-term fluctuations.
"Lastly, consider consulting an independent financial adviser, who can help determine your risk profile and take a holistic look at your finances to recommend the best solution for your specific needs," says Fourie.
Questions may be edited for brevity and clarity.
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