Understanding the different risks in investment planning
Warwick Free State Regional Manager, Wiann Van Zyl discusses some of the investment risks clients should be aware of and how Warwick attempts to mitigate these. (Picture of Wiann Van Zyl, Warwick Free State Regional Manager here please)
As 2023 lies excitedly before us, it is once again a good opportunity for clients to review their investment portfolios and understand the different types of risks that their hard-earned savings are exposed to and the investment fundamentals Warwick utilises to navigate through them on behalf of our valued clients.
Types of investment risks
Inflation risk, also known as purchasing power risk because the ability to purchase various goods and services is dependent on the changing levels of prices in an economy. The risk is that the investment will lose purchasing power over time.
Interest rate risk
The values of all financial assets are, to some extent, dependent on the interest rates in the economy. When changes in interest rates are unexpected, the changes in asset values are said to arise from interest rate risk.
Market risk, also known as volatility, is the day-to-day fluctuations in an asset’s price.
Business risk and financial risks
Business risk is the uncertainty of the cash flows of the company. The less certain the cash flows to the company, the greater the risk will be for the investor.
Financial risk is the uncertainty of how a company finances its investments. If a business uses ordinary shares to finance investments, it incurs business risks. If the company borrows money, it must pay fixed or floating interest before providing returns to investors.
Liquidity risk is concerned with the ability to convert the value of an asset into cash relative to its market value. Investors will increase their required rates of return to compensate for liquidity risk.
Country risk, also called political or sovereign risk, is the uncertainty of returns caused by the possibility of major change in the political or economic environment of a country.
Currency risk, also called exchange-rate risk, is the uncertainty of returns from assets in a foreign currency. Currency movement is difficult to predict and when an investor sells an asset in a foreign currency the conversion value becomes uncertain.
Asset allocation risk
The above illustrates the uncorrelated returns of global asset classes and that no asset class outperforms year-after-year.
According to the Morningstar data, if a client invested R1,000,000 into the Balanced Portfolio at the beginning of 2010, that same R1,000,000 would be worth R4,011,875.98 at the end of November 2022. This represents a return of 10.8% per annum, of which the worst calendar year performance was -2.6% in 2018.
Once again, this is a reminder that we should all utilise the one and only one free lunch in investment planning: diversification.
Warwick offers clients investment solutions that are tailor-made to suit their specific objectives, which range from local money market to offshore share portfolios. These offerings are all regulated through CISCA, FAIS and FICA to provide our clients with peace of mind.
Notably, Warwick operates from a Category 2 License, which allows for regular rebalancing of portfolios so that our clients are not exposed too heavily to any risk or asset class in any global market.
Another important aspect of investment planning is to regularly review your portfolio to make sure that your objective and goals are aligned with your asset allocation. Finally, at Warwick we pride ourselves as being client care centric. All staff sign a client care charter to ensure clients receive the best possible attention, care and focus they deserve. To ensure this, all Warwick investment clients are contacted at minimum every quarter and reviews are done at minimum annually.
We wish you a successful and happy 2023 and please remember that if you have any questions relating to any investment matter, please do not hesitate to contact your dedicated Warwick professional.