Google
RSS Feeds RSS | Views on ITInews | contact | terms of use | privacy 
 


Editorial Categories:

FINANCIAL SERVICES
ADVISERS & BROKERS
BANKING & BONDS
BUSINESS MANAGEMENT
COLUMNISTS
CONSUMER AFFAIRS
CRIME & FRAUD
ECONOMY & GLOBAL
EDUCATION & TRAINING
ESTATES & WILLS
HEALTHCARE INSURANCE
INDUSTRY & LEGISLATION
INSURANCE
INVESTING
LEGAL AFFAIRS
LIABILITY INSURANCE
LIFE INSURANCE
MARKETING
PEOPLE & COMPANIES
POLITICS
PROPERTY
RETIREMENT PROVISION
REVIEWS
ROAD ACCIDENT FUND
SHARES & UNIT TRUSTS
SHORT-TERM INSURANCE
TAXATION
TECHNOLOGY
VIEWS & LETTERS


Forthcoming Events:

No Upcoming Events


Available Recruitment:

No Vacancies Listed...


Save by getting insurance quotes


Your Editor, Brent WilsonInforming Consumers and Financial Advisors since 1988 | Click Here to Advertise
Car, household, life and business insurance quotes
Press Offices > Investment Companies

Citadel Investment Services
Press Office Feature : Four ways to lose your money

Company: Citadel Investment Services
Author:John Kennedy
Email:[email protected]
Posted:02 Feb 2016

 Email this article Comment on this Article  Print this article

... especially when greed or fear gets in the way

When making investments, there are four key risks – irrespective of an investor’s age – to understand and be aware of which if managed correctly should help you to avoid permanent loss of capital.

Integrity Risk

Firstly, there is integrity risk which refers to the risk of choosing the wrong partner, or making the wrong investment choice.

Placing one’s trust in an unscrupulous player is often a quick route to losing money.

The lure of unrealistically high or swift returns can appeal to investors who are swept up in the emotion of greed which can overtake logic.

History is littered with examples of chancers who have taken advantage of the human desire to get rich quickly.

It is therefore important to assess the quality of investment partners – institutions or individuals – and their ethical standards.

Be careful of the promise of excess returns – there is always significant risk involved.

Inflation Risk

The second risk to be aware of is inflation risk. Inflation is an absolute number and it compounds over time, erasing purchasing power along the way.

If you do not beat inflation in real terms (after taking inflation into account), you are going backwards. In addition, it is important to look at the after-tax return.

An interest rate of 7.25% currently might sound appealing, but with inflation creeping up from the current 4.7%, on a real basis, the after-tax return is significantly lower.

Fearing capital loss, investors often remain invested in cash or cash equivalents.

This is a sure way to erode the value of the capital over time as inflation eats away at the buying power. For example, let’s assume that inflation is 5%.

After five years, the same capital would only be able to afford 77.4% of what one could buy at the beginning, thereby guaranteeing an effective loss. It is important to map out the inflation risk over the long term which, for us, is decades.

Credit or Counterparty Risk

The third risk I’d like to consider is credit risk or counterparty risk which occurs when one lends money to another party – this is the risk that the interest or the capital will not be paid.

We may think that this applies to companies and smaller entities, but governments and parastatals can also find themselves unable to pay the interest on a bond or even repay the capital.

For example, since 2010 Greece has been unable to cover its debt and has required three bailouts by other countries in the past five years.

Closer to home, in June this year Edcon asked bondholders to take a haircut on its 475 million euros of company bonds as it struggled to keep afloat.

Valuation Risk

And finally there is valuation risk. This is the risk that the price you pay does not necessarily reflect the underlying value of the instrument – in other words that you have overpaid for it.

Investors need to know and understand the value of what they are purchasing. We often look at discounted cash flows to determine the value over time of the stock that is being acquired.

You may think that you are getting a bargain if you buy something on a low p:e ratio or a high yield. However, there could be a very good reason for the low price that should not be ignored.

And the same is true when selling an asset. If you sell it at a discount to its true value, you are locking in a loss.

It’s easy to be persuaded to take on some of these risks, especially when greed or fear gets in the way.

When investing, be aware of the various risks that you face. Irrespective of your age, adopting excessive risk can lead to capital loss and financial distress.

John Kennedy is Director: Wealth Planning, Citadel

Comments:
There are no comments at this stage. Be the first to comment!
Please Login To Comment On an Article - Click here To Login

ITInews invites comments at the foot of each of its articles in which readers can respond freely - anonymously if they wish - to various topical issues and industry debates. However, comments submitted by readers that are defamatory or deemed, by the editors, to be racist or obscene will be deleted from the database. Furthermore, ITInews's editor would like to caution potential posters on its websites that while it welcomes robust debate, it will not hesitate to make the IP addresses of the authors of such defamatory statements available to the authorities, in the event of a court order compelling them to do so.



Get car, home, life and business insurance quotes in 3 easy steps


Citadel Investment Services


Join us today

More from Citadel Investment Services
Addressing queries regarding Citadel and the Panama Papers
There are legitimate uses for offshore companies and trusts
Buying time for SA
'we should stop ... bailing out state entities'
The year that was – business highs and lows in 2015
The damage has been done and it will take years to restore confidence in the South African markets
Bleak 2016 for markets in wake of Nene’s removal
More concerning is that Zuma did not give any reasons for Nene’s removal
Public benefit organisations must guard against economic volatility with reserve policies
A duty to be responsible stewards of public funding and trust
Budget speech communication to be spiced up at Citadel
We plan to delve deeper into those issues that may have an impact on client's investment decisions
Citadel ups prize money for journalism award
Role of media to inform and educate people about financial issues is now more crucial than ever

Join ITInews in supporting Helpnet.org.za

Archived Articles featuring this company ...


Insurance Quotes


Car Insurance Quotes
Household Insurance Quotes
Business Insurance Quotes
Funeral Insurance Quotes
Life Insurance Quotes

Read the InsuranceQuotes Blog
ITM Website Design Cape Town
Copyright © 2005 - 2015 ITInews Online Publications (Pty) Ltd. All rights reserved Insurance Times & Investments Online and ITInews. ..::ISSN 1995-1256::.. No part of the materials including graphics or logos, available in this Web site may be copied, photocopied, reproduced, translated or reduced to any electronic medium or machine-readable form, in whole or in part, without specific permission from ITInews Online Publications (Pty) Ltd. Distribution for commercial purposes is prohibited.