"The biggest risk of all is not taking one" - Mellody Hobson
The QnA series is for all of the famous questions we all think in our minds but could be too shy to ask or don't know who to ask.
Owning a single stock or two and trying to time the market is not an investment, that is like playing Lotto Star every week. Most likely you will end up like this guy...
When we look at risk and return I would like to point out the Markowitz frontier which is outdated but the principle is sound. The premise is that you take a bunch of different portfolios i.e. 50% stock 50% bonds or 70% stock and 30% bonds etc you get the idea and then plot them on a graph. Then depending on your risk preferences or return desires you pick a portfolio that matches. Which stocks go into that X% portfolio is another debate but lets assume we select the "perefect" combination.
Take a second to look at the graph, you'll notice that as the risk goes up of a portfolio of many different shares, bonds etc. the overall return will also go up. However, in reality we might find two portfolios, one very risky and the other not as risky but both end up giving the same return. I am sure you can conclude that the riskier portfolio was not worth it because you needed to undergo a lot more risk yet were not compensated for that extra risk. This is seen in red on the graph. You want to find a portfolio anywhere along the line above. Along this line risk can be upped or lowered and the returns would also change but it is the most efficient way in doing so. In other words, if you want the least amount of risk and the best return you have to find a portfolio on the left by the kink in the graph. This would mean the least amount of risk possible with the most return on that range of riskiness.
It is very difficult to find this optimal portfolio mix in reality. But it will likely be made up of majority South African Government bonds and a little bit of equity. Does this sound like a good idea to you? Firstly, it is a very boring journey to just own bonds and secondly with the current interest rate environment it is not the best time to start owning bonds
So what now?
The goal of financial mentorship is to grow you out of your own comfort zone and educate you. This is a lesson you need to learn early on. You have to take risk (if you want to retire comfortably) and take it when you are young with many years to go without needing to touch the money saved. Risk should be measured long term as the real return of an asset and not short term fluctuations. In the long term (10 years) if your portfolio is up 100% while a more stable bond fund is up 50%, who took more risk? well you have 50% less total capital after 10 years in the one and that seems more risky speaking long term.
