THOUGHT OF THE WEEK

INVESTMENT RISK (PART 2)

5. REINVESTMENT RISK
This is the risk of losing higher returns on the principal or income due to the low rate of interests on the market. For example, you have a bond with a 10% return that has matured, and principal has to be invested at a rate of 7%, this will make the investor lose the opportunity to earn higher returns.

6. INFLATION RISK
The risk of loss of purchasing power because investments do not earn higher returns than inflation. Inflation erodes the returns on an investment and lowers the purchasing power of money. Therefore, if the return on an investment is lower than the inflation, the investor is at a higher inflation risk.

HOW TO MANAGE INVESTMENT RISK
Though every investment carries some amount of risk, these risks can be managed and controlled. The following are ways to manage risks.

1. DIVERSIFICATION
This is the spreading of investments into various assets like shares, bonds, real estate etc. by doing this, the investor will gain from other investments if one of them does not perform. Diversification can be achieved across different assets and within assets. For example, investing across various sectors when investing in stocks is a way of diversifying within the same asset.

2. INVESTING CONSISTENTLY (AVERAGING)
By investing small amounts at regular intervals, the investor can average his/her investments. Sometimes investments will be bough high, sometimes low, and maintain the initial cost price of the investment. On the other hand, if the investment rises in the market price, there will be a gain on the whole investment.

3. INVESTING FOR THE LONG TERM
Long-term investments are able to provide higher returns than short-term investments. Although there are short-term volatilities in security prices, they generally gain when invested over a long period.

Disclaimer
This weekly report is the copyright of NIMED Capital Ltd. (NIMED), an investment banking company licensed and regulated by the Securities and Exchange Commission (S.E.C.) of Ghana as Investment Advisers as well as the National Pensions Regulatory Authority (N.P.R.A.) as an approved Pension Fund Manager. Information and opinions herein have been compiled or arrived at based on information obtained from sources considered reliable; we therefore do not hold ourselves responsible for its completeness or accuracy. All statements of opinion, projections, forecasts, or those relating to expectations regarding future events or performance of investments represent NIMED’s own assessment and interpretation of information currently available to NIMED, which are subject to change.