February 15, 2017: When faced with the need to invest safely and capitalise our savings we often ask ourselves if this is possible. Our first and immediate answer will be no, as every investment involves some level of risk, with the possibility that it can lose value. But let us explore further and not be carried away by this first assumption.
While it is a fact that in most countries the pension fund is legally ‘untouchable’, there have been constants episodes where companies or governments supported by the sparse or better said ‘bad regulation’ of supervisory agencies, much often motivated by greed, easy money and, let’s be honest, low levels of financial literacy among consumers, make decisions that do not contribute to our goals. Consumers are simply not involved with the decision making, and they are rarely made aware of the funding status or investments held by the managers.
The relative risk of investments varies widely. Indeed, some investments are inherently more risky than others, but a good start to investing safely is improving our financial literacy and educate ourselves on which types of investments are available on the market, theirs returns and, of course, what are the associated risks.
In order to reduce our investment risk, we must understand it first, as the more we get to know, the more comfortable we get to making good and financially responsible decisions.
Looking at investment offers in the market, we have on one end the spectrum of super-safe investments with low returns and on the other end, riskier but higher-yielding alternatives. It is a mistake, however, to think that this is a general rule. Alternative investment options exist — like the forex market where each trader choses how much risk he wants to assume and not the broker. This is just another example of our lack of financial knowledge. Indeed, the fact that banks aren’t capable of delivering decent returns, doesn’t mean that it isn’t possible.
Finally, and getting back to my question, the secret to investing safely as you climb up the risk/reward scale is knowledge. The more you know, the better you can discern which risks to take and which to avoid. Never let an opinion decide for your own investments — no one needs a bachelor in finance to take his finances into his own hands.
And, of course, don’t invest money that you do not have. Investments will always involve some level of risk and you don’t want to owe money that you cannot afford to pay. Last but not least, remember that the financial market is ever changing — never stop learning.