Magazine article New Zealand Management

Go On-Take a Risk: Alison Renfrew Urges Would-Be Investors to Let Loose Their Fear Shackles

Magazine article New Zealand Management

Go On-Take a Risk: Alison Renfrew Urges Would-Be Investors to Let Loose Their Fear Shackles

Article excerpt

If you are afraid of losing, you will take no risks--and you'll never go anywhere or do anything.

Okay--it takes courage, particularly if you've been burned in the past.

Take someone who's just suffered a stroke or heart attack. They won't recover unless they get moving again--but that can be scary remembering their last bout of activity led to a three-month stay in hospital.

It's also scary climbing back on the finance horse. Have you ever lost money on the sharemarket? Or through a failed property deal? Or even by lending it to the wrong person? Losing money simply means you have had a learning experience. Life is about learning. The past doesn't equal the future.

My mother-in-law explained to me very earnestly a few years ago that she wouldn't invest anywhere other than the banks because in 1952 there was a terrible investment property crash in Singapore (where they were living at the time) and lots of people lost money. She didn't. She hadn't invested in the scheme. She must have been cautious even then. Fortunately she and her husband were financially secure thanks to those old-fashioned Government Superannuation plans where you got paid an inflation-adjusted pension for the rest of your life if you'd signed up for it. Few people today are part of this scheme and the majority of us haven't figured out that we need to take responsibility for our own wealth creation programmes.

Investing is about making money and getting the return appropriate to the risk taken.

One of the major problems New Zealanders have is an inability to identify the level of risk involved and understand what the investment return should be based on these risks. What they need to know is the Risk Adjusted Return (ROR).

If a debenture is advertised for 9.5 percent you might think it's a slightly higher return than another offering only eight percent, so there will be a slightly higher risk involved. This is a totally naive assumption. Of course, some people don't think of returns and risks at all. They assume that the firm offering the highest return is simply the better and smarter firm and therefore that's where they should invest.

Some investment companies offering around 7.5 percent to 9.5 percent returns should actually be offering 20+ percent returns when the ROR is taken into account. …

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