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.
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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.

www.surecanone.com

Cheers!