Monday, June 2, 2008

Low Risk Securities doesn't mean Low Risk

This is something I found from an old training file and I find it pretty relevant under such high inflationary environment. Low risk securities such as Fixed Deposits and Money Market Funds are proven to be no longer low risk.
Time Horizon is the Crucial Factor
* I always like to divide our funds into 3 baskets namely short, Mid and Long Term
* Short probably means 1-3 years, Mid = 4-7 years and Long = 7 years and above
* Fixed Deposit is good for short term due to its liquidity, but bad for long term investment due to high inflation.
* Equity Investment is bad for short term due to its volatility, but good for long term due to higher potential real returns after considering inflation
* The one is between is Bonds and probably some Endowment plans found in the market.
* Risk cannot be completely diversified but there are many studies and analysis that prove that a proper diversified portfolio over long term gives good returns and over 90% can be explained via asset allocation.

I think this chart is self explanatory and I don't think I need to elaborate so much. What I want to quote is "What you preceive as risky may not be as risky as you think. What you preceive as safe may not be as safe as you wish."

1 comment:

yf... said...

Like this article... short and sweet. Will use it sometime in my blog. :) And yea, i'd link you, and i wont plagiarize. :P i believe in giving ppl credit where it is due. haha.