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Managing risks in the current volatile market

COMMENTARY
By | October 25th 2011

By Odhiambo Ocholla

In the current volatile market environment, investors are faced with myriad of risk ranging from volatility in exchange rate, inflation risk to high interest rates risk.

Investing is about taking risks, and when you do that, you’re entitled to expect a return that’s commensurate with the level of risk you take.

Risk is a fact of business life. Taking and managing risk is part of what very single investors must do to create profits or have a reasonable return for their investments.

Whether you are an investor in real estate, stock market, money market or simply running a business managing risk is a very critical component of creating and maintaining wealth.

There is no investment that has no risk. Reports that some real estate investors have lost money in irregular lands deals in Athi River and Kitengela are confirmation that every investment has its own risk thus the onus should be for investors to mitigate every risk they face seriously less you lose all your investments.

To manage risk properly, investors need to know exactly what risks they face and the potential impact on their fortunes.

Investment decisions

Investors must not only understand the types of risk it bears but also know the amount of money at stake. But in reality investment risk comes in many forms and each can affect how you pursue your financial goals.

There are some risks that investors cannot control, that is, inflation risk, interest rate risk, market risk credit risk etc.

Understanding the relationship between risk and return is essential to understanding why people make some of the investment decisions they do.

Currently interest rates are edging up and investors are advised to go underweight in shares and put the bulk of their money in money market instruments such as Treasury bills which are having lucrative returns.

Investors should also know how manage inflation risk which is projected to hit 20 per cent by the end of the year.

This is a risk that the value of your investment will be eroded by a decline in the purchasing power of you savings as a result of inflation.

Thus, investors cannot ignore inflation risk, which unlike other forms of risk, cannot be avoided.

Over the course of a day, a month, or a year, the price of your investments may fluctuate, sometimes dramatically.

The current volatility in the shilling versus the dollar has exacerbated the problem.

This constant movement, known as volatility, varies from investment to investment, with some investments being significantly more volatile than others.

Volatility poses the biggest investment risk in the short term.

Long-term rewards

But if you can wait out downturns in the market, chances are that the value of a diversified portfolio will rebound, and you’ll end up with a gain.

If you look at the big picture, you’ll discover that what seems to be a huge drop in price over the short term evens out over the long term.

In fact, in long term share which is currently the most volatile investments will always increased in value.

Even land and properties tend to increase in value over the long term period, thus investors are advised to take a keen interest on this investment segment.

Everyone handles risk differently. That’s because some people can live with or can afford to take more risk than others.

The younger you are, the more investment risk you generally can afford to take.

That’s because you have the time to wait for a rebound when there is a downturn in the market. But if you’ve retired or are nearing retirement, you may be counting on income from your investments. Your life circumstances also play a role in how much risk you are willing to take.

Your personality matters as well. There’s no disputing the fact that most investments will drop in value at some point. That’s what risk is all about.

However, if you’re uncomfortable with risk, you are encouraged to learn more about the long-term rewards of well-planned risk-taking.

—Mr Ocholla is an Investment Banker.

[email protected]

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