Balancing risk and reward

Business

Balancing risk and reward

The Sterling Report

BY DWAYNE NEIL

Sunday, January 19, 2020

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As we begin a new year and a new decade with renewed hope and great expectations, we must remember that we need to put the necessary mechanisms in place to meet our new year resolutions.

Financial goals/resolutions are near to, if not at the top of everyone's list. These goals may be short-, medium- or long-term…saving more, investing more, purchasing a property or other assets.

Once our goals have been established, we need to look at the available investment vehicles which will allow us to achieve them in the desired time frame. As there are a myriad of investment options available globally, it is important to analyse these options and compare the reward (interest) with the associated level of risk of each investment.

Higher returns normally indicate a higher level of risk when compared to investments with lower returns. This is evident when one looks at returns generated by treasury bills/certificates of deposit (low risk) as compared to stocks (high risk).

Each investor must determine the level of risk with which they are comfortable. Higher returns may not adequately compensate the investor for the added amount of risk being undertaken.

In order to balance the risk/reward dynamic, diversification is an important strategy to be employed. Diversification is simply allocating investment funds to various securities. This reduces exposure to a single security and the potential of a loss if the individual security underperforms. Investors should spread their risk to reduce their chance of losing money.

Investors can, along with their investment advisor, create a diversified portfolio of securities spanning different geographical regions and industries. Once the portfolio is created monitoring is important on an ongoing basis to ensure that the investments continue to meet the desired risk/reward benchmark designated by the investor.

Continual monitoring also allows investors to take advantage of portfolio gains and mitigate against potential losses. The portfolio should also be adjusted as needed to ensure maximum earning is achieved without taking on unnecessary levels of risk.

Investors also have the option of investing in mutual funds and other such managed investment products in order to diversify their investment portfolios. Investing in mutual funds also gives investors the benefit of having a professional portfolio manager monitor and make changes to the portfolio as necessary.

The fund manager will pool the funds of several investors and invest as a single portfolio. Smaller investors can benefit from investing in securities which normally would have a high minimum investment requirement. Both large and small investors also benefit from lower fees as compared to purchasing securities individually.

A good portfolio manager will also be guided by solid research data and can make timely decisions in order to maximize the profitability of the portfolio. The individual investor will not be tasked with monitoring their own portfolio as this is done by the fund manager. This can be best for investors looking at a medium- to long-term investment horizon and wanting to hedge their investments against devaluation of the Jamaican dollar as well as against inflation.

Whether you are a first-time or a seasoned investor, it is important to balance risk and reward. As you make your financial resolutions and set your financial goals always keep in mind that risk and reward have an inverse relationship. Always be sure that you are being properly compensated for the risk you are taking. Contact your investment advisor for guidance as you look to keep your resolutions and meet your goals.

Dwayne Neil, MBA, B.Sc. is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.


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