We always hear the expression “No Pain No Gain”, whether it be from friends, colleagues, family members etc. Actually, this statement is very true and it can be applied in any field. Let met take the investment field for example and share what I understand by this phrase.
The term “No Pain No Gain” can be associated with the term “High Risk, High Reward” in investment. Because in investment, the higher the risk that we bear, the higher the return that we can reap, but also do not forget higher loss that we will incur if the investment goes bad. How do we actually know that an investment is low risk or high risk? Let me share with you characteristics of a high risk investment, and from there you can take the opposite of it to be low risk investment characteristics.
Determining amount of risk riding on an investment can be done by investigating the following characteristics:
1. Amount of $$$ riding on it: Simply said, the higher proportion of your money invested in something, the higher the risk you are taking. It goes back to the saying “Don’t put all your eggs in one basket”. For example, if you had RM100k and invested it all in property, it something goes bad then you will lose all your money. But if the property appreciates really well, your return will be maximized since you invested all your money in it. If you had invested RM50k in property and RM50k in shares, then should something happen to the property investment, you will still have the RM50k you invested in shares. Therefore, do diversify, but do not overdiversify so that you can manage all your investments.
2. Volatility: Volatility refers to how fast the value of investment can fluctuate. High volatility means the value of investment can fluctuate on very short notice and low volatility implies that the value of investment is stable and will not fluctuate on short timeframe. One example of a volatile investment is the stock market. In just a few minutes, the price of a stock can go from RM0.20 to RM0.30 or from RM0.50 to RM0.25. So, if you’re holding mass quantities of these stocks, you will have either made a great gain or suffered a great loss. For more stable investments, go for property, bonds, unit trusts and some others which your investment value will not fluctuate on very short notice.
3. Type of Industry: Different industries have different risks riding on them. Generally, we can identify which industries are low risk and which are high risk. But to be specific, an industry can be both low and high risk, depending on other affecting parameters. In general, low risk industries are industries like banking, agriculture and food because these industries always have significant demand. High risk industries include construction, transportation and IT because in these industries, competition is getting tougher and tougher and companies need to have cutting edge talent and resources to be able to make good profit.
4. Personal Touch: We are all humans, and to a certain extent we trust those that have personal touch with us more compared to total strangers. To me, having looked at all the other 3 characteristics above, I will also need to look at whether the person that I am in contact with for that particular investment has a personal touch with me or not. If there is person A who is a total stranger, and person B who I personally know, which both of them can offer the same risk and return on investment after looking at all 3 items above, I will prefer person B. This is because choosing a person I personally know means there is lower chance of being cheated and taken advantage of. Plus, when we personally know their background, family, financial status and resources, we will have more confident and trust in the person, therefore we will feel less worried about an investment although it is high risk.
This has been quite an elaborate post. Hopefully you will benefit from it. There are other small parameters that are used to determine risk of an investment, but what I shared above is just the significant ones. For further clarification, do not hesitate to post a comment or you can even contact me for a drink.
Happy fasting to all Muslims and happy Merdeka Day to all Malaysians!