This note seeks to put as a basis our framework and to make sure we speak from the same dictionary.
Investing is fundamentally obsessed with keeping your money safe and then giving you extra. But make no mistakes, it is first and foremost about the preservation of capital.
Often when you hear the guy in a suite ask “what is your risk appetite” all he is asking is “How much money are you willing to lose in order to go after the return that I am saying is probable?” This opens up a few items for expansion/assessment:
- Money. Money is as much an emotion as it is a resource. Do you have the money firstly? Do you have the stomach to watch your money fluctuate with the times. i.e. are you able to keep the butterflies in your stomach quiet during election times, Brexit, Natural disasters or as Mr Benjamin Graham put it “Would you be comfortable with where your money is if the stock market were to ‘switch off’ for 10 years?”
- Willing to lose. This does not imply “give me your money” but rather that you should understand that your risk appetite reflects your confidence over how long it would take you to recover from losing the money you are able to put in. ie over a 20 year period I think I would recover from a R1 million Rand loss… translated differently I have a R1 million risk tolerance over 20 years or a R137 risk tolerance over 24 hours. Ask yourself these questions and see where you start being uncomfortable and where will gladly play with your money.
- In order to go after. One of the great distinctions between investing and speculation is that investment implies you are willing to put in some effort to realise a return. Your effort should have a discernible impact on your return. Speculation on the other hand implies giving up your ability to impact the return yet still wait in line for that return. And yes I do imply when you hand your money over to someone you cannot influence you are speculating!
- The Return. Only now we speak about how much you may get back. Is what you are after big enough given what you are willing to put on the line? What can I expect to get back basically.
- That is probable. This puts everything that preceded it in context. What is more likely to occur if i put Rxxx in this vehicle over a Y amount of time. Your time horizon normally is used to esquire how long I have to grow your money. Normally we would match it with your expected expenditure, or as the guy in a suit would say, your investment goal. This starts to show why you have always been at odds with your adviser who thinks the quickest way to make you a million for your house purchase next year is to put it in the bank, while you were hoping he’d say Bitcoin.
Therefore, how much money are you realistically willing to go without over how long for me to have the opportunity to find the investment vehicle that best offsets your intended expense?
Randela’s – South African term used to refer to Rands, the official currency, which bears the face of Nelson Mandela, the country’s first democratically elected president.
Portfolio – The term used to refer to your collection of investments.
Platform – A bridge or place that connects one side to another. In investing refers to the service that allows you to purchase your investments.
Lekker ding – An Afrikaans (one of the official languages of South Africa) expression meaning “lovely thing.”
Kasi – informal term for a Township
Ke – a sePedi (one of the official languages of South Africa) term meaning I.
ke – an isiZulu (one of the official languages of South Africa) term meaning then.
Tenets – Characteristics
nyana – a sePedi (one of the official languages of South Africa) term meaning small.
Nay’ – An isiZulu (one of the official languages of South Africa) term meaning Here Is.